e10vq
United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2006
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-16391
TASER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
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86-0741227 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification Number) |
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17800 N. 85 th St., SCOTTSDALE, ARIZONA
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85255 |
(Address of principal executive offices)
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(Zip Code) |
(480) 991-0797
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer þ Non-accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
There were
62,202,153 shares of the issuers common stock, par value $0.00001 per share,
outstanding as of August 7, 2006.
TASER INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2006
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TASER INTERNATIONAL, INC.
BALANCE SHEETS
(UNAUDITED)
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June 30, 2006 |
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December 31, 2005 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
15,419,832 |
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$ |
16,351,909 |
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Short-term investments |
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5,110,858 |
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Accounts receivable, net of allowance of $111,000 in 2006 and 2005, respectively |
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7,807,840 |
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5,422,027 |
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Inventory |
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9,605,618 |
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10,105,336 |
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Prepaids and other assets |
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1,271,303 |
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2,795,576 |
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Insurance settlement proceeds receivable |
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4,500,000 |
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575,000 |
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Income tax receivable |
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1,754 |
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44,454 |
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Current deferred income tax asset |
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8,098,737 |
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6,955,500 |
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Total current assets |
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51,815,942 |
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42,249,802 |
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Long-term investments |
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28,612,203 |
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27,548,120 |
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Property and equipment, net |
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21,034,034 |
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21,061,754 |
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Deferred income tax asset |
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23,837,068 |
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20,040,788 |
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Intangible assets, net |
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1,421,697 |
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1,340,783 |
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Total assets |
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$ |
126,720,944 |
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$ |
112,241,247 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities
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Current portion of capital lease obligations |
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$ |
44,137 |
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$ |
43,111 |
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Accounts payable and accrued liabilities |
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6,464,541 |
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6,315,654 |
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Current deferred revenue |
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722,590 |
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561,165 |
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Deferred insurance settlement proceeds |
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439,226 |
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476,515 |
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Customer deposits |
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203,233 |
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190,256 |
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Litigation
settlement liabilities |
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21,750,000 |
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Total current liabilities |
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29,623,727 |
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7,586,701 |
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Capital lease obligations, net of current portion |
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53,856 |
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76,188 |
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Deferred revenue, net of current portion |
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1,164,777 |
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839,983 |
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Total liabilities |
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30,842,360 |
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8,502,872 |
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Commitments and Contingencies |
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Stockholders equity |
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Preferred stock, $0.00001 par value per share; 25 million shares authorized; 0
shares issued and outstanding at June 30, 2006 and December 31, 2005 |
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Common stock, $0.00001 par value per share; 200 million shares authorized;
62,054,653 and 61,938,654 shares issued and outstanding at June 30, 2006 and
December 31, 2005, respectively |
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620 |
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619 |
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Additional paid-in capital |
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79,683,675 |
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78,742,862 |
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Retained earnings |
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16,194,289 |
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24,994,894 |
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Total stockholders equity |
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95,878,584 |
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103,738,375 |
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Total liabilities and stockholders equity |
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$ |
126,720,944 |
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$ |
112,241,247 |
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The accompanying notes are an integral part of these financial statements.
3
TASER INTERNATIONAL, INC.
STATEMENTS OF INCOME
(UNAUDITED)
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For the Three Months Ended |
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For the Six Months Ended |
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June 30, 2006 |
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June 30, 2005 |
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June 30, 2006 |
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June 30, 2005 |
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(As restated, see note 3) |
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(As restated, see note 3) |
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Net Sales |
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$ |
16,225,197 |
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$ |
13,206,659 |
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$ |
30,118,760 |
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$ |
23,410,820 |
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Cost of Products Sold: |
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Direct manufacturing expense |
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4,229,384 |
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3,525,670 |
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7,758,785 |
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6,635,876 |
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Indirect manufacturing expense (1) |
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1,605,190 |
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1,489,466 |
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3,014,658 |
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3,018,281 |
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Total Cost of Products Sold |
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5,834,574 |
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5,015,136 |
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10,773,443 |
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9,654,157 |
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Gross Margin |
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10,390,623 |
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8,191,523 |
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19,345,317 |
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13,756,663 |
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Sales, general and administrative expenses (1) |
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7,603,035 |
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7,110,265 |
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14,857,347 |
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12,517,642 |
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Research and development expenses (1) |
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562,991 |
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395,541 |
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1,226,801 |
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742,904 |
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Litigation
settlement expenses |
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17,650,000 |
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17,650,000 |
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Income (loss) from operations |
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(15,425,403 |
) |
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685,717 |
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(14,388,831 |
) |
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496,117 |
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Interest income |
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430,593 |
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347,837 |
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798,028 |
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546,712 |
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Interest expense |
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(1,883 |
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(15 |
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(3,890 |
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(103 |
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Other expense, net |
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(116 |
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(59,360 |
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(228 |
) |
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(59,735 |
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Income (loss) before provision for income taxes |
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(14,996,809 |
) |
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974,179 |
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(13,594,921 |
) |
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982,991 |
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Provision (credit) for income taxes |
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(5,390,225 |
) |
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477,062 |
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(4,794,316 |
) |
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480,481 |
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Net income (loss) |
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$ |
(9,606,584 |
) |
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$ |
497,117 |
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$ |
(8,800,605 |
) |
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$ |
502,510 |
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Income (loss) per common and common equivalent shares |
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Basic |
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$ |
(0.15 |
) |
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$ |
0.01 |
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$ |
(0.14 |
) |
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$ |
0.01 |
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Diluted |
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$ |
(0.15 |
) |
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$ |
0.01 |
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$ |
(0.14 |
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$ |
0.01 |
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Weighted average number of common and common
equivalent shares outstanding |
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Basic |
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62,035,485 |
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61,319,959 |
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61,990,714 |
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61,209,420 |
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Diluted |
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62,035,485 |
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63,951,739 |
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61,990,714 |
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64,152,543 |
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For the Three Months Ended |
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For the Six Months Ended |
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June 30, 2006 |
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June 30, 2005 |
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June 30, 2006 |
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June 30, 2005 |
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(1) Stock-based compensation was allocated as follows: |
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Indirect manufacturing expense |
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$ |
30,711 |
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$ |
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$ |
62,545 |
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$ |
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Sales, general and administrative |
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233,236 |
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|
500,380 |
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Research and development expenses |
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47,701 |
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110,723 |
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$ |
311,648 |
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$ |
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$ |
673,648 |
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$ |
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The accompanying notes are an integral part of these financial statements.
4
TASER INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
The accompanying notes are an integral part of these financial statements.
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For the Six Months Ended |
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June 30, 2006 |
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June 30, 2005 |
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(As restated, see note 3) |
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Cash Flows from Operating Activities: |
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Net income (loss) |
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$ |
(8,800,605 |
) |
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$ |
502,510 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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1,043,069 |
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706,055 |
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Loss on disposal of fixed assets |
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56,872 |
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Provision for excess and obsolete inventory |
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3,472 |
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Provision for warranty |
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169,125 |
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146,873 |
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Stock-based compensation expense |
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673,648 |
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Deferred insurance settlement proceeds recognized |
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(37,289 |
) |
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Deferred income taxes |
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(4,939,517 |
) |
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40,439 |
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Excess tax benefits from stock-based compensation |
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452,552 |
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Change in assets and liabilities: |
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Accounts receivable |
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(2,385,813 |
) |
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1,934,429 |
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Inventory |
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496,246 |
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(2,133,585 |
) |
Prepaids and other assets |
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1,524,273 |
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|
266,821 |
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Insurance settlement proceeds receivable |
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(3,925,000 |
) |
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Income tax receivable |
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|
42,700 |
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(3,993 |
) |
Accounts payable and accrued liabilities |
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(20,238 |
) |
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(2,834,403 |
) |
Deferred revenue |
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|
486,219 |
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|
42,952 |
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Customer deposits |
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12,977 |
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|
107,688 |
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Litigation
settlement liabilities |
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21,750,000 |
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Net cash provided (used) by operating activities |
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6,093,267 |
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(714,790 |
) |
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Cash Flows from Investing Activities: |
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Purchases of investments |
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(63,087,942 |
) |
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(15,021,689 |
) |
Proceeds from investments |
|
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56,913,001 |
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|
22,752,556 |
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Purchases of property and equipment |
|
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(995,205 |
) |
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(5,711,267 |
) |
Purchases of intangible assets |
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(101,058 |
) |
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(39,306 |
) |
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Net cash provided (used) by investing activities |
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|
(7,271,204 |
) |
|
|
1,980,294 |
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Cash Flows from Financing Activities: |
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Payments under capital leases |
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(21,306 |
) |
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|
(4,642 |
) |
Proceeds from options exercised |
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|
267,166 |
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|
443,603 |
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Net cash provided by financing activities |
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|
245,860 |
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|
438,961 |
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Net increase (decrease) in Cash and Cash Equivalents |
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|
(932,077 |
) |
|
|
1,704,465 |
|
Cash and Cash Equivalents, beginning of period |
|
|
16,351,909 |
|
|
|
14,757,159 |
|
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Cash and Cash Equivalents, end of period |
|
$ |
15,419,832 |
|
|
$ |
16,461,624 |
|
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|
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Supplemental Disclosure: |
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Cash paid for interest |
|
$ |
3,890 |
|
|
$ |
103 |
|
Non Cash Transactions- |
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|
Increase to deferred tax asset related to tax benefits realized from the exercise of
stock options |
|
$ |
|
|
|
$ |
726,586 |
|
Increase to property and equipment with a corresponding increase in accounts payable |
|
$ |
|
|
|
$ |
1,121,091 |
|
5
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited)
1. Company background
TASER
International, Inc. (TASER or the Company) is a global leader in the development and
manufacture of advanced electronic control devices designed for use in law enforcement,
corrections, private security and personal defense. The Companys core expertise includes
proprietary, patented technology which is uniquely capable of incapacitating highly focused and
aggressive subjects. The Companys proprietary Neuro-Muscular Incapacitation (NMI) technology uses
electrical impulses to interfere with a subjects neuron-muscular system, causing substantial
incapacitation regardless of whether the subject feels or responds to pain. The Companys current
flagship products are the TASER M26 and TASER X26 models. Both the M26 and the X26 are hand-held
devices which launch two wire-tethered probes at a remote target up to a maximum distance of 35
feet. These wire tethered probes serve to form an electrical connection from the TASER device to
the subject, thereby eliminating the need for the user to make close contact with the potentially
dangerous target. In addition to the hand-held devices, the Company also sells disposable
cartridges which contain the probes, wires, and proprietary nitrogen propulsion system. These
cartridges are disposable and provide a recurring revenue stream from the Companys installed
customer base. There are several models of cartridges with ranges from 15 feet to 35 feet and
include both electrically active cartridges and inert simulation cartridges used only in training.
The Company also sells batteries, chargers, holsters and other accessories.
It should be noted that the Companys products are often used in aggressive confrontations
that may result in serious, permanent bodily injury or death to those involved. A person injured in
a confrontation or otherwise in connection with the use of the Companys products may bring legal
action against the Company to recover damages on the basis of theories including personal injury,
wrongful death, negligent design, dangerous product or inadequate warning. The Company is currently
subject to a number of such lawsuits. The Company may also be subject to lawsuits involving
allegations of misuse of its products. The Company has seen and expects to continue to see
additional complaints filed against it alleging injuries resulting from the use of a TASER device.
If successful, personal injury, misuse and other claims could have a material adverse effect on the
operating results and financial condition of the Company. Although the Company carries product
liability insurance, significant litigation could also result in a diversion of managements
attention and resources, negative publicity and an award of monetary damages in excess of its
insurance coverage. The outcome of any litigation is inherently uncertain and there can be no
assurance that existing or any future litigation will not have a material adverse effect on the
Companys revenues, financial condition or financial results.
The Companys deferred tax asset includes $77.3 million in net operating loss carryforwards.
The amount of the deferred tax asset is considered realizable, however, it could be reduced in the
near term if estimates of future taxable income during the carryforward period are reduced.
2. Summary of significant accounting policies
a. Basis of presentation
The accompanying unaudited financial statements of TASER International, Inc. include all
adjustments (consisting only of normal recurring accruals) which management considers necessary for
the fair presentation of the Companys operating results, financial position and cash flows as of
June 30, 2006 and June 30, 2005 and the periods then ended. Certain information and note
disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) have been omitted from these
unaudited financial statements in accordance with applicable rules.
The results of operations for the three and six month periods are not necessarily indicative
of the results to be expected for the full year (or any other period) and should be read in
conjunction with the financial statements and notes thereto included in the Companys Annual Report
on Form 10-K as filed on March 16, 2006.
6
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
b. Segment information
Management has determined that its operations are comprised of one reportable segment. For the
three and six months ended June 30, 2006 and 2005, sales by geographic area were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Six Months Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
United States
|
|
|
88 |
% |
|
|
86 |
% |
|
|
90 |
% |
|
|
87 |
% |
Other Countries
|
|
|
12 |
% |
|
|
14 |
% |
|
|
10 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to customers outside the United States are denominated in U.S. dollars. All
assets of the Company are located in the United States.
c. Stock-Based compensation
Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under
the recognition and measurement provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB Opinion No. 25) and related interpretations, as
permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123). Accordingly, no stock-based compensation expense was recognized in
the income statement for the three and six-month periods ended June 30, 2005, as all options
granted under the Companys stock-based employee compensation plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. As permitted by SFAS No. 123,
stock-based compensation was included as a pro forma disclosure in the notes to the Companys
financial statements for the three and six month periods ended June 30, 2005.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123(R), Share Based Payment (SFAS No. 123(R))
using the modified prospective transition method. Under that transition method, compensation cost
recognized in the three and six months ended June 30, 2006 includes: (a) compensation cost for all
stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the
grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for
prior periods have not been restated, as provided for under the modified-prospective method.
Total stock-based compensation expense recognized in the income statement for the three and
six months ended June 30, 2006 was $311,648 and $673,648 before income taxes, respectively. The
related total deferred tax benefits were approximately $106,000 and $221,000 for the three and six
months ended June 30, 2006, respectively.
Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions
resulting from the exercise of stock options as operating cash flows in the consolidated statements
of cash flows. SFAS No. 123(R) requires the tax benefits resulting from tax deductions in excess of
the compensation cost recognized for those options (excess tax benefits) to be classified and
reported as both an operating cash outflow and a financing cash inflow on a prospective basis upon
adoption.
The following table shows the effect on net income and basic and diluted earnings per share
for the three and six months ended June 30, 2005 had compensation cost been recognized based upon
the estimated fair value on the grant date of stock options in accordance with SFAS 123, as amended
by SFAS No. 148 Accounting for Stock-Based Compensation
Transition and Disclosure.
7
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
Net income as reported |
|
$ |
497,117 |
|
|
$ |
502,510 |
|
Add: Total stock-based compensation included in net income as reported |
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee compensation determined under fair
value based method for all awards, net of related tax effects |
|
|
(1,792,000 |
) |
|
|
(2,282,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss pro forma |
|
$ |
(1,294,883 |
) |
|
$ |
(1,779,490 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share as reported: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
Diluted |
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
Net loss per common share pro forma: |
|
|
|
|
|
|
|
|
Basic, pro forma |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
Diluted, pro forma |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average number of common and common equivalent shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
61,319,959 |
|
|
|
61,209,420 |
|
Diluted |
|
|
63,951,739 |
|
|
|
64,152,543 |
|
Disclosures for the three and six month periods ended June 30, 2006 are not presented because
the amounts are recognized in the financial statements in connection with the adoption of SFAS
123R.
SFAS No. 123R requires the use of a valuation model to calculate the fair value of stock-based
awards. The Company has elected to use the Black-Scholes-Merton (BSM) option valuation model,
which incorporates various assumptions including volatility, expected life, and interest rates. The
assumptions used for the three and six month periods ended June 30, 2006 and June 30, 2005 and the
resulting estimates of weighted-average fair value per share of options granted during those
periods are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
Expected Life |
|
3.49 years |
|
1.5 - 3 years |
|
3.49 years |
|
1.5 - 3 years |
Volatility |
|
|
67.8% - 70.3 |
% |
|
|
106 |
% |
|
|
67.8% - 70.3 |
% |
|
|
106 |
% |
Risk Free Interest Rate |
|
|
4.87% - 5.11 |
% |
|
|
3.50 |
% |
|
|
4.5% - 5.11 |
% |
|
|
3.50 |
% |
Dividend Yield |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the period |
|
$ |
4.98 |
|
|
$ |
4.40 |
|
|
$ |
4.76 |
|
|
$ |
4.71 |
|
The expected life of the options represents the estimated period of time until exercise and is
based on historical experience of similar awards, giving consideration to the contractual terms,
vesting schedules and expectations of future employee behavior. For 2006, expected stock price
volatility is based on a combination of historical volatility of the Companys stock and the
one-year implied volatility of its traded option for the related vesting periods. Prior to the
adoption of SFAS 123R, expected stock price volatility was estimated using only historical
volatility of the Companys stock. The risk-free interest rate is based on the implied yield
available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The Company has
not paid dividends in the past and does not plan to pay any dividends in the near future.
8
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
d. Income per Common Share
The Company accounts for earnings per share in accordance with SFAS No. 128, Earnings per
Share. Basic income per share is computed by dividing net income by the weighted average number of
common shares outstanding during the periods presented. Diluted income per share reflects the
potential dilution that could occur if outstanding stock options were exercised. The calculation of
the weighted average number of shares outstanding and earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share |
|
|
Earnings Per Share |
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
Numerator for basic and diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(9,606,584 |
) |
|
$ |
497,117 |
|
|
$ |
(8,800,605 |
) |
|
$ |
502,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share weighted average
shares outstanding |
|
|
62,035,485 |
|
|
|
61,319,959 |
|
|
|
61,990,714 |
|
|
|
61,209,420 |
|
Dilutive effect of shares issuable under stock options outstanding |
|
|
|
|
|
|
2,631,780 |
|
|
|
|
|
|
|
2,943,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share adjusted weighted
average shares outstanding |
|
|
62,035,485 |
|
|
|
63,951,739 |
|
|
|
61,990,714 |
|
|
|
64,152,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.15 |
) |
|
$ |
0.01 |
|
|
$ |
(0.14 |
) |
|
$ |
0.01 |
|
Diluted |
|
$ |
(0.15 |
) |
|
$ |
0.01 |
|
|
$ |
(0.14 |
) |
|
$ |
0.01 |
|
Basic net income (loss) per share is based upon the weighted average number of common shares
outstanding during the period. As a result of the net loss for the three and six months ended
June 30, 2006, 2,706,707 and 2,704,115, respectively, of potential dilutive securities were considered anti-dilutive and excluded from the calculation. For the three and
six months ended June 30, 2005, the effects of 430,906 stock options, were excluded from
the calculation of diluted income per share as their effect would have been antidilutive and
increased the net income per share.
e. Warranty Costs
The Company warrants its products from manufacturing defects on a limited basis for a period
of one year after purchase, and thereafter will replace any defective
TASER unit for a fee. The Company also
sells extended warranties for periods of up to four years after the expiration of the limited one
year warranty. The Company tracks historical data related to returns and related warranty costs on
a quarterly basis, and estimates future warranty claims by applying the estimated average return
rate to the product sales for the period. Historically, the reserve amount is increased if the
Company becomes aware of a component failure that could result in larger than anticipated returns
from its customers. After the one year warranty expires, if the device fails to operate properly
for any reason, the Company will replace the ADVANCED TASER device for a fee and the TASER X26 for
a prorated discounted price depending on when the product was placed into service. These fees are
intended to cover the handling and repair costs and include a profit. A summary of changes in the
warranty accrual for the six months ended June 30, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
June 30, 2005 |
|
Balance at Beginning of Period |
|
$ |
851,920 |
|
|
$ |
457,914 |
|
Utilization of Accrual |
|
|
(273,221 |
) |
|
|
(449,855 |
) |
Warranty Expense |
|
|
169,125 |
|
|
|
596,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of the Period |
|
$ |
747,824 |
|
|
$ |
604,746 |
|
|
|
|
|
|
|
|
f. Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109.
This Interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return, and provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years
beginning after December 15, 2006. Management is currently assessing the impact of the
Interpretation on its financial statements.
In November 2005, the Financial Accounting Standards Board (the FASB) issued
FASB Staff Position No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (FSP 123(R)-3). Under the provisions
of FSP 123(R)-3, entities may follow either the transition guidance
for the additional paid-in capital pool as prescribed by SFAS 123(R), or elect to use the alternative transition method as described in the FSP.
An entity that adopts SFAS 123(R) using the modified prospective application method may make a one-time election to adopt the transition method described in the FSP. The Company
is currently evaluating the available transition alternatives and has until November 2006, which is one year from the effective date of the FSP, to finalize the one-time election.
9
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
3. Restatement of Previously Issued Financial Statements for Manufacturing Overhead and Error
Corrections
On May 11, 2006, the Company concluded that its financial statements at March 31, 2005, June
30, 2005 and September 30, 2005 and for the periods then ended,
included in its Form 10-Qs for the
periods ended March 31, 2005, June 30, 2005 and September 30, 2005, respectively, should no longer
be relied upon due to an error in those financial statements which resulted in the incorrect
calculation of manufacturing overhead costs being applied to inventory. The Company has restated
its results for the quarter ended March 2005 in its Form 10-Q filed for the period ended March 31,
2006 and is amending the results of the quarter ended June 30, 2005 herein. The Company will
amend its Form 10-Q for the period ended September 30, 2005 to reflect the restated results of
that period. No restatement of the Companys financial statements for the years ended December 31,
2005 and December 31, 2004 is necessary as a result of the matters discussed below as the Company
has determined they are not material to those periods based on the materiality guidelines contained
in SEC Staff Accounting Bulletin No. 99 Materiality.
During
the first quarter of 2006, the Company determined that its historical methodology for
the calculation of indirect manufacturing overhead costs applied to inventory was incorrect and
also identified a clerical error in the calculation of the overhead applied to inventory for the
three months ended December 31, 2005. The Company originally recorded an adjustment in the first
quarter of 2006 to correct the net cumulative impact of the change in methodology and the clerical
error. However, as it was subsequently determined that the impact of correcting the methodology
related to prior periods was material to the operating results of the first quarter of 2006, a
further adjustment was necessary to reflect the cumulative impact against the relevant prior year
periods. Additionally, the Company has recorded the impact of previously unrecorded adjustments
related to cut-off errors primarily for legal and professional fees and the related income tax
effects which were previously deemed to be immaterial.
A summary of the impact to correct the cumulative amount of manufacturing overhead costs
applied to inventory, record previously unrecorded proposed cut-off errors and the related income
tax effects on the financial statements for the quarter ended June 30, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2005 |
|
Six Months Ended June 30, 2005 |
|
|
As |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously |
|
Overhead |
|
Cut-off |
|
|
|
|
|
As Previously |
|
Overhead |
|
Cut-off |
|
|
|
|
Reported |
|
Adjustments |
|
Adjustments |
|
As Restated |
|
Reported |
|
Adjustments |
|
Adjustments |
|
As Restated |
Statements of Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indirect manufacturing expense |
|
$ |
1,219,342 |
|
|
$ |
270,124 |
|
|
$ |
|
|
|
$ |
1,489,466 |
|
|
$ |
2,637,161 |
|
|
$ |
381,120 |
|
|
$ |
|
|
|
$ |
3,018,281 |
|
Total Cost of Products Sold |
|
|
4,745,012 |
|
|
|
270,124 |
|
|
|
|
|
|
|
5,015,136 |
|
|
|
9,273,037 |
|
|
|
381,120 |
|
|
|
|
|
|
|
9,654,157 |
|
Gross Margin |
|
|
8,461,647 |
|
|
|
(270,124 |
) |
|
|
|
|
|
|
8,191,523 |
|
|
|
14,137,783 |
|
|
|
(381,120 |
) |
|
|
|
|
|
|
13,756,663 |
|
Sales, general and administrative expenses |
|
|
7,240,994 |
|
|
|
(137,884 |
) |
|
|
7,155 |
|
|
|
7,110,265 |
|
|
|
12,831,094 |
|
|
|
(192,345 |
) |
|
|
(121,107 |
) |
|
|
12,517,642 |
|
Income from operations |
|
|
825,112 |
|
|
|
(132,240 |
) |
|
|
(7,155 |
) |
|
|
685,717 |
|
|
|
563,785 |
|
|
|
(188,775 |
) |
|
|
121,107 |
|
|
|
496,117 |
|
Income before provision for income taxes |
|
|
1,113,574 |
|
|
|
(132,240 |
) |
|
|
(7,155 |
) |
|
|
974,179 |
|
|
|
1,050,659 |
|
|
|
(188,775 |
) |
|
|
121,107 |
|
|
|
982,991 |
|
Provision for income taxes |
|
|
451,000 |
|
|
|
24,724 |
|
|
|
1,338 |
|
|
|
477,062 |
|
|
|
427,000 |
|
|
|
3,115 |
|
|
|
50,366 |
|
|
|
480,481 |
|
Net income |
|
$ |
662,574 |
|
|
$ |
(156,964 |
) |
|
$ |
(8,493 |
) |
|
$ |
497,117 |
|
|
$ |
623,659 |
|
|
$ |
(191,890 |
) |
|
$ |
70,741 |
|
|
$ |
502,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.01 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.01 |
|
Diluted |
|
$ |
0.01 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.01 |
|
|
$ |
0.01 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,2005 |
|
|
As Previously |
|
Overhead |
|
Cut-off |
|
|
|
|
Reported |
|
Adjustments |
|
Adjustments |
|
As Restated |
Statement of Cash Flows |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
623,659 |
|
|
|
(191,890 |
) |
|
|
70,741 |
|
|
|
502,510 |
|
Deferred income taxes |
|
|
(13,042 |
) |
|
|
3,115 |
|
|
|
50,366 |
|
|
|
40,439 |
|
Change in
assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory |
|
|
(2,322,360 |
) |
|
|
188,775 |
|
|
|
|
|
|
|
(2,133,585 |
) |
Accounts Payable and accrued liabilities |
|
|
(2,713,296 |
) |
|
|
|
|
|
|
(121,107 |
) |
|
|
(2,834,403 |
) |
10
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
4. Cash, cash equivalents and investments
Cash and cash equivalents include funds on hand and short-term investments with original maturities
of three months or less. Short-term investments include securities generally having original
maturities of 90 days to one year. Long-term investments include securities having original
maturities of more than one year. The Companys long-term investments are invested in federal
agency mortgage-backed securities, and are classified as held to maturity. These investments are
recorded at amortized cost. The Company intends to hold these securities until maturity. The
Company intends to reinvest the proceeds from maturing short and long term investments into
securities with similar original maturities.
The following is a summary of cash, cash equivalents and held-to-maturity investments
by type at June 30, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Cash |
|
$ |
7,934,653 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,934,653 |
|
|
$ |
6,387,796 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,387,796 |
|
Government sponsored entity securities |
|
|
41,208,240 |
|
|
|
9,469 |
|
|
|
(488,265 |
) |
|
|
40,729,444 |
|
|
|
37,512,233 |
|
|
|
22,887 |
|
|
|
(388,252 |
) |
|
|
37,146,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and
investments |
|
$ |
49,142,893 |
|
|
$ |
9,469 |
|
|
$ |
(488,265 |
) |
|
$ |
48,664,097 |
|
|
$ |
43,900,029 |
|
|
$ |
22,887 |
|
|
$ |
(388,252 |
) |
|
$ |
43,534,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Government sponsored entity securities reported as: |
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
7,485,179 |
|
|
$ |
9,964,113 |
|
Short term investments |
|
|
5,110,858 |
|
|
|
|
|
Long term investments |
|
|
28,612,203 |
|
|
|
27,548,120 |
|
|
|
|
|
|
|
|
|
|
$ |
41,208,240 |
|
|
$ |
37,512,233 |
|
|
|
|
|
|
|
|
The following table summarizes the contractual maturities of government sponsored entity
securities at June 30, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Less than 1 year |
|
$ |
22,742,404 |
|
|
$ |
14,980,493 |
|
1-3 years |
|
|
18,465,836 |
|
|
|
22,531,740 |
|
|
|
|
|
|
|
|
|
|
$ |
41,208,240 |
|
|
$ |
37,512,233 |
|
|
|
|
|
|
|
|
The following table provides information about held-to-maturity investments with
gross unrealized losses and the length of time that individual investments have been in a
continuous unrealized loss position at June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
Unrealized |
|
|
|
|
|
Unrealized |
Description of Securities |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
Government sponsored entity securities |
|
$ |
6,923,390 |
|
|
$ |
(31,323 |
) |
|
$ |
24,555,835 |
|
|
$ |
(456,942 |
) |
|
$ |
31,479,225 |
|
|
$ |
(488,265 |
) |
The unrealized losses on the Companys investment in government sponsored entity securities
were caused by interest rate increases. The contractual cash flows of these investments are
guaranteed by an agency of the U.S. Government and, accordingly it is expected that the securities
would not be settled for a price less than the amortized cost of the investment. Since the decline
in fair value was attributable to interest rates and not credit quality, and because the Company
has the ability and intent to hold these investments to maturity, the Company does not consider
these investments to be other than temporarily impaired at June 30, 2006.
11
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
5. Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the weighted
average cost which approximates the first-in, first-out (FIFO) method. Provisions are made to
reduce potentially excess, obsolete or slow-moving inventories to their net realizable value.
Inventories as of June 30, 2006 and December 31, 2005 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
December 31, 2005 |
|
Raw materials and work-in-process |
|
$ |
5,841,198 |
|
|
$ |
8,054,683 |
|
Finished goods |
|
|
3,909,928 |
|
|
|
2,311,403 |
|
Reserve for excess and obsolete inventory |
|
|
(145,508 |
) |
|
|
(260,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Inventory |
|
$ |
9,605,618 |
|
|
$ |
10,105,336 |
|
|
|
|
|
|
|
|
6. Intangible assets
Intangible assets consist of the following at June 30, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Useful Life |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER.com domain name |
|
5 Years |
|
$ |
60,000 |
|
|
$ |
60,000 |
|
|
$ |
|
|
|
$ |
60,000 |
|
|
$ |
56,000 |
|
|
$ |
4,000 |
|
Issued patents |
|
|
4 to 15 Years |
|
|
|
198,910 |
|
|
|
71,081 |
|
|
|
127,829 |
|
|
|
168,280 |
|
|
|
59,238 |
|
|
|
109,042 |
|
Issued trademarks |
|
|
9 to 11 Years |
|
|
|
15,109 |
|
|
|
1,424 |
|
|
|
13,685 |
|
|
|
14,198 |
|
|
|
695 |
|
|
|
13,503 |
|
Non compete agreement |
|
7 Years |
|
|
50,000 |
|
|
|
21,429 |
|
|
|
28,571 |
|
|
|
50,000 |
|
|
|
17,857 |
|
|
|
32,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324,019 |
|
|
|
153,934 |
|
|
|
170,085 |
|
|
|
292,478 |
|
|
|
133,790 |
|
|
|
158,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER Trademark |
|
|
|
|
|
|
900,000 |
|
|
|
|
|
|
|
900,000 |
|
|
|
900,000 |
|
|
|
|
|
|
|
900,000 |
|
Patents and trademarks pending |
|
|
|
|
|
|
351,612 |
|
|
|
|
|
|
|
351,612 |
|
|
|
282,095 |
|
|
|
|
|
|
|
282,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,251,612 |
|
|
|
|
|
|
|
1,251,612 |
|
|
|
1,182,095 |
|
|
|
|
|
|
|
1,182,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
1,575,631 |
|
|
$ |
153,934 |
|
|
$ |
1,421,697 |
|
|
$ |
1,474,573 |
|
|
$ |
133,790 |
|
|
$ |
1,340,783 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months ended June 30, 2006 and 2005 was $9,129 and $9,781,
respectively. Amortization expense for the six months ended June 30, 2006 and 2005 was $20,145 and
$19,563, respectively. Estimated amortization expense of intangible assets for the balance of 2006,
the next four years and thereafter is as follows:
|
|
|
|
|
2006 |
|
$ |
16,849 |
|
2007 |
|
|
33,698 |
|
2008 |
|
|
33,698 |
|
2009 |
|
|
21,776 |
|
2010 |
|
|
13,622 |
|
Thereafter |
|
|
50,442 |
|
|
|
|
|
|
|
$ |
170,085 |
|
|
|
|
|
12
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
7. Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consist of the following at June 30, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
December 31, 2005 |
|
Accounts payable |
|
$ |
3,474,073 |
|
|
$ |
4,027,335 |
|
Accrued expenses |
|
|
1,558,602 |
|
|
|
954,908 |
|
Accrued warranty expense |
|
|
747,824 |
|
|
|
851,920 |
|
Accrued salaries and benefits |
|
|
684,042 |
|
|
|
481,491 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,464,541 |
|
|
$ |
6,315,654 |
|
|
|
|
|
|
|
|
8. Income taxes
The deferred income tax asset at June 30, 2006 is comprised primarily of a net operating loss
carryforward, which resulted from the compensation expense the Company recorded for income tax
purposes when employees exercised stock options in 2004. For the three and six months ended June 30, 2006,
the Company did not recognize additional tax benefits related to
stock options exercised. A total
tax benefit of $1,166,224 was credited to additional paid-in capital in the six months ended June
30, 2005. Additionally, warranty and inventory reserves, accrued vacation and other items have
contributed to the deferred income tax asset.
The
Companys total current and long term deferred tax asset at
June 30, 2006 is $31.9 million. In preparing the Companys financial statements, the Company has assessed the likelihood
that its deferred tax assets will be realized from future taxable income. In evaluating the ability
to recover its deferred income tax assets, the Company considers all available positive and
negative evidence, including its operating results, ongoing tax planning and forecasts of future
taxable income on a jurisdiction by jurisdiction basis. A valuation allowance is established if it
is determined that it is more likely than not that some portion or all of the net deferred tax
assets will not be realized. The Company exercises significant judgment in determining its
provisions for income taxes, its deferred tax assets and liabilities and its future taxable income
for purposes of assessing its ability to utilize any future tax benefit from its deferred tax
assets. Although the Company believes that its tax estimates are reasonable, the ultimate tax
determination involves significant judgments that could become subject to audit by tax authorities
in the ordinary course of business. As a result of the shareholder
litigation settlement expense recorded for the
three and six months ended June 30, 2006 (see footnote 14),
the Company has determined that it is more likely than not that its
net operating loss carryforwards for the state of Arizona, which
expire in 2009, will not be fully realized. Accordingly, the Company
has recorded a valuation allowance of $250,000, against its deferred
tax assets as of June 30, 2006. The Company believes that, other
than as previously described, as of June 30, 2006, based on an
evaluation and projections of future sales and profitability, no
other valuation allowance was deemed
necessary as the Company concluded that it is more likely than not that the Companys net deferred
tax assets will be realized. However, the deferred tax asset could be reduced in the near-term if
estimates of future taxable income during the carryforward period are reduced.
13
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
9. Stockholders equity
Stock Award Activity
At June 30, 2006, the Company had three stock-based compensation plans, which are described
more fully in Note 11 to the financial statements included in the Companys Annual Report on Form
10-K as filed on March 16, 2006.
The following table summarizes the stock options available and outstanding as of June 30, 2006
and June 30, 2005 as well as activity during the six months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options |
|
|
Shares |
|
|
|
|
|
Weighted |
|
|
Available for |
|
Number of |
|
Average |
|
|
Grant |
|
options |
|
Exercise Price |
Balance at December 31, 2005 |
|
|
5,381,980 |
|
|
|
6,161,933 |
|
|
$ |
4.92 |
|
Granted |
|
|
(85,125 |
) |
|
|
85,125 |
|
|
$ |
9.14 |
|
Exercised |
|
|
|
|
|
|
(105,821 |
) |
|
$ |
1.67 |
|
Expired/terminated |
|
|
65,994 |
|
|
|
(65,994 |
) |
|
$ |
4.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
|
5,362,849 |
|
|
|
6,075,243 |
|
|
$ |
5.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
6,832,750 |
|
|
|
5,605,419 |
|
|
$ |
3.16 |
|
Granted |
|
|
(1,414,297 |
) |
|
|
1,414,297 |
|
|
$ |
9.19 |
|
Exercised |
|
|
|
|
|
|
(347,400 |
) |
|
$ |
1.27 |
|
Expired/terminated |
|
|
88,145 |
|
|
|
(88,145 |
) |
|
$ |
6.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005 |
|
|
5,506,598 |
|
|
|
6,584,171 |
|
|
$ |
4.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options outstanding as of June 30, 2006 have been segregated into five ranges
for additional disclosure as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
Weighted |
|
|
Number |
|
Average |
|
Remaining |
|
Number |
|
Average |
Range of Exercise Price |
|
Outstanding |
|
Exercise Price |
|
Contractual Life |
|
Exercisable |
|
Exercise Price |
$0.28 - $0.99 |
|
|
1,345,101 |
|
|
$ |
0.36 |
|
|
|
6.3 |
|
|
|
1,345,101 |
|
|
$ |
0.36 |
|
$1.03 - $2.41 |
|
|
1,838,538 |
|
|
$ |
1.61 |
|
|
|
2.8 |
|
|
|
1,821,704 |
|
|
$ |
1.60 |
|
$5.89 - $9.65 |
|
|
2,391,980 |
|
|
$ |
8.08 |
|
|
|
7.4 |
|
|
|
2,250,035 |
|
|
$ |
8.08 |
|
$10.10 - $19.76 |
|
|
433,724 |
|
|
$ |
14.41 |
|
|
|
8.2 |
|
|
|
335,166 |
|
|
$ |
14.75 |
|
$20.12 - $29.98 |
|
|
65,900 |
|
|
$ |
23.83 |
|
|
|
8.0 |
|
|
|
51,415 |
|
|
$ |
23.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.28 - $29.98 |
|
|
6,075,243 |
|
|
$ |
5.03 |
|
|
|
5.9 |
|
|
|
5,803,421 |
|
|
$ |
4.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of options outstanding and options exercisable at June 30, 2006 was
$22.6 million and $22.4 million, respectively. Aggregate intrinsic value represents the difference
between the Companys closing stock price on the last trading day of the fiscal period, which was
$7.91 as of June 30, 2006, and the exercise price multiplied by the number of options outstanding.
Total intrinsic value of options exercised was $947,000 and $4.2 million for the six-month periods
ended June 30, 2006 and 2005, respectively. As of June 30, 2006, total unrecognized stock-based
compensation expense related to non-vested stock options was approximately $1.5 million, which is
expected to be recognized over a weighted average period of approximately 13 months.
The total fair value of options vested was $14.3 million and $9.3 million for the six-month
periods ended June 30, 2006 and 2005, respectively.
14
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
10. Line of credit
The Company has a line of credit agreement with a bank which provides for a total availability
of $10 million. The line is secured primarily by the Companys accounts receivable and inventory
and bears interest at varying rates of interest, ranging from LIBOR plus 1.5% to prime. The
availability under this line is computed on a monthly borrowing base, which is based on the
Companys eligible accounts receivable and inventory. The line of credit matures on June 30, 2008
and requires monthly payments of interest only. At June 30, 2006, the available borrowing was $7.9
million and there was no amount outstanding under the line of credit. There have been no borrowings
under the line of credit to date.
The Companys agreement with the bank requires the Company to comply with certain financial
and other covenants including maintenance of minimum tangible net worth and fixed charge coverage
ratios. At June 30, 2006, the Company was in compliance with all covenants.
11. Legal proceedings
Securities Litigation
Securities Class Action Litigation
Beginning on or about January 10, 2005, numerous securities class action lawsuits were filed
against the Company and certain of its officers and directors. These actions were filed on behalf
of the purchasers of the Companys stock in various class periods, beginning as early as May 29,
2003 and ending as late as January 14, 2005. The majority of these lawsuits were filed in the
District of Arizona. Four actions were filed in the United States District Court for the Southern
District of New York and one in the Eastern District of Michigan. The New York and Michigan actions
were transferred to the District of Arizona. The class actions were consolidated by Judge Susan
Bolton and Lead Plaintiff and Lead Counsel were selected. The Lead Plaintiff filed a consolidated
complaint (which became the operative complaint for all of the class actions) on August 29, 2005.
The operative class period is May 29, 2003 to January 11, 2005. The defendants filed a motion to
dismiss the consolidated complaint, which has been fully briefed for the Court but has not yet been
decided.
The consolidated complaint alleges, among other things, violations of the Securities Exchange
Act of 1934, as amended, and Rule 10b-5, promulgated thereunder, and seeks unspecified monetary
damages and other relief against all defendants. The consolidated amended complaint generally
alleges that the Company and the individual defendants made false or misleading public statements
regarding, among other things, the safety of the Companys products and the Companys ability to
meet its sales goals, including the validity of a $1.5 million sales order with the Companys
distributor, Davidsons, in the fourth quarter of 2004. The consolidated complaint also alleges
that product defects were leading to excessive product returns by customers.
On
July 25, 2006, we participated in a mediation conference in an attempt to settle
the pending securities class action and shareholder derivative lawsuits. Discussions continued and
the parties have reached a tentative settlement agreement. Under the tentative settlement,
defendants would provide the plaintiff class $20 million in exchange for a release of
all claims based on or arising out of the allegations in the consolidated complaint. The settlement
would be funded by approximately $4.1 million in cash provided by a Directors and Officers Liability
Insurance policy; approximately $7.9 million in cash funded by the Company;
and $8 million in the Companys common stock valued as of the date at which the stock is
transferred (941,176 shares, based on a closing market price of $8.50 at July 25, 2006). The number of shares is subject to change based on the market price of the Company's stock at the
consummation of the settlement. At the Companys
election, the stock portion of the settlement may be funded with cash. The settlement is
conditioned on agreement on the appropriate settlement documents; certification of the plaintiff
class; approval by the court; and other factors. There is no assurance that the settlement will be
completed. If the settlement is not completed, the parties may attempt to reach agreement on
another settlement, or resume the litigation.
Shareholder Derivative Litigation
Beginning on or about January 11, 2005, numerous shareholder derivative actions were also
filed against the Companys officers and directors. Such actions have been filed in the United
States District Court for the District of Arizona, the Arizona Superior Court in Maricopa County,
and the Delaware Chancery Court in New Castle County. The derivative actions pending in the Arizona
Superior Court and the Delaware Chancery Court have been stayed pending resolution of the
consolidated Arizona District Court action. The plaintiffs in the Arizona District Court action
filed a consolidated complaint on May 13, 2005. The Company and the individual defendants filed
motions to dismiss the consolidated complaint on August 19, 2005. On March 17, 2006, the Court
denied the motions to dismiss. Defendants answered the consolidated complaint on April 21, 2006.
Discovery has commenced and no trial date has been set.
The derivative complaints are based on similar facts and events as those alleged in the
securities class action complaints. The complaints generally allege that the individual defendants
breached the fiduciary duties that they owe to the Company and its shareholders by reason of their
positions as officers and/or directors of the Company. The complaints claim that such duties were
breached by defendants disclosure of allegedly false or misleading statements about the safety and
effectiveness of Company products and the Companys financial results. The complaints also claim
that fiduciary duties were breached by defendants alleged use of non-public information regarding
the safety of Company products and the Companys financial condition and future business prospects
to commit insider trading of the Companys stock. The derivative plaintiffs seek damages and
restitutionary, equitable, injunctive and other relief.
On
July 25, 2006, we participated in a mediation conference in an attempt to settle
the pending securities class action and shareholder derivative lawsuits. Discussions continued and
the parties have reached a tentative settlement agreement. Under the proposed settlement,
defendants would agree to certain measures to improve the Companys corporate governance and pay a
settlement fee of $1.75 million of the Companys common stock valued as of the date at which the
stock is transferred (205,882 shares, based on a closing market
price of $8.50 at July 25, 2006), in exchange for a release by plaintiffs of all claims based on or arising out
of the complaint. As part of the settlement, the Company anticipates that the other derivative
cases and the Section 220 of Delaware General Corporation Law case will be dismissed. The
settlement is conditioned on agreement on the appropriate settlement document, approval by the
Court, and other factors. There is no assurance that the settlement will be completed. If the
settlement is not completed, the parties may attempt to reach agreement on another settlement, or
resume the litigation.
15
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
Demand for Inspection of Documents Litigation
On May 4, 2005, a Company shareholder filed an action in the Delaware Chancery Court against
the Company under Section 220 of Delaware General Corporation Law, demanding the inspection of
certain corporate documents. The Company filed an answer to the complaint on June 7, 2005. The
plaintiff served discovery requests on February 14, 2006. In connection with the settlement of the federal derivative actions discussed above, the Company
anticipates that the Section 220 case will be dismissed. There is no assurance that the action
will be dismissed or settled.
Securities and Exchange Commission Investigation
In December 2004, the Company was informed that the staff of the Securities and Exchange
Commission had commenced an informal inquiry concerning the Companys public statements regarding
the safety and performance of the Companys products, certain disclosure issues and the accounting
for certain transactions. The Company voluntarily provided documents and information to the SEC
staff. In August 2005, the Company was informed that the staff of the SEC had initiated a formal
investigation as of June 20, 2005, regarding the Companys disclosures concerning the medical
safety of its products; the accounting and disclosure of certain transactions; and the unauthorized
acquisition of confidential information from the Company by persons outside the Company for the
possible purpose of manipulating the Companys stock. The Company provided additional information
at the request of the SEC staff. In December 2005, the SEC staff advised the Company that it had
completed its investigation into the Companys disclosures concerning the medical safety of the
Companys products; and into the accounting and disclosure issues. The SEC staff further advised
the Company that it had determined that it would not recommend that the Commission institute any
enforcement proceedings as to these matters. The SEC staff also advised the Company that it was
continuing to investigate issues relating to trading in the Companys stock. In May 2006, the SEC
staff advised the Company that the SEC investigation has been terminated in its entirety with no
recommendation for enforcement action.
Contract Litigation
In March 2000, Thomas N. Hennigan, a sales representative for our products from late 1997
through early 2000, sued the Company and certain of our shareholders in the United States District
Court, Southern District of New York. The Company previously sued him in February 2000 in the
United States District Court for the District of Arizona, but had not served him. After the New
York case was dismissed in February 2001 for lack of personal jurisdiction, Mr. Hennigan brought a
counterclaim in the United States District Court for the District of Arizona. Mr. Hennigan claims
the exclusive right to sell our products to many of the largest law enforcement, corrections, and
military agencies in the United States. He sought monetary damages that may amount to as much as
$500,000 against us allegedly arising in connection with his alleged service to the Company as a
distributor. His claims rest on theories of our failure to pay commissions, breach of contract,
promissory estoppel, breach of fiduciary duty, and on related theories. No written contract was
ever signed with Mr. Hennigan. We believe that he has no reasonable basis for claims based on
informal or implied contractual rights and will be unable to prove his damages with reasonable
certainty. Mr. Hennigan died in April 2001 and the case is now being prosecuted by his estate. On
May 24, 2002, H.A. Russell was permitted to proceed as an additional defendant-counterclaimant. We
filed various motions in November 2002 for partial summary judgment including a motion to dismiss
his claims. On September 30, 2003, the Court issued an order granting our motion for partial
summary judgment to dismiss Mr. Russells claims and struck Hennigans jury demand. On April 14,
2004, the Court issued an opinion partially granting our motion for partial summary judgment on
certain joint venture, post-termination, post-death and exclusivity claims. A pretrial conference
was held on July 28, 2005 and the trial started on August 31, 2005. At the conclusion of Hennigans
case in chief, we made a motion to dismiss Hennigans case. The court issued a briefing schedule on
our motion and the trial was suspended pending the courts decision on our motion. On August 4, 2006 the Court issued an opinion and order dismissing with prejudice all of plaintiffs claims, except the Court set a briefing schedule for an alleged remaining claim for $9,600.
In September 2004, the Company was served with a summons and complaint in the matter of Roy
Tailors Uniform Co., Inc. v. TASER International in which the plaintiff alleges that it is entitled
to commissions for disputed sales that were made to customers that are claimed to be plaintiffs
customers for which plaintiff is seeking monetary damages. Plaintiff failed to sign a distributor
agreement with the Company and did not have distribution rights with the Company. This case is in
the discovery phase and a trial date has been scheduled for April 2007.
Other Class Action Litigation
In August 2005, the Company was served with a summons and complaint in the matter of Village
of Dolton v. TASER International in which the Plaintiff alleges that defendant misled the plaintiff
about the safety of the TASER device when they purchased the TASER device and are seeking damages.
The plaintiff is seeking to certify the lawsuit as a class action. We have filed an answer to the
complaint and a motion to dismiss. In October 2005, we filed a declaration of the former chief of
police for the Village of Dolton which refutes many of the allegations made in the complaint and we
filed a motion for sanctions. In October 2005, the Court issued an order partially granting our
Motion to Dismiss, and denied the balance of the motions. The case is now moving forward with
discovery.
16
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
Product Liability Litigation
The
Company is currently named as a defendant in 50 lawsuits in which the plaintiffs alleged
either wrongful death or personal injury in situations in which the TASER device was used (or
present) by law enforcement officers or during training exercises. In
addition, 22 other
lawsuits have been dismissed and are not included in this number. Two
of the lawsuits that have been
dismissed or judgement entered in favor of TASER are on appeal. With respect to each of these pending 50 lawsuits, the table below lists
the name of plaintiff, the date the Company was served with process, the jurisdiction in which the
case is pending, the type of claim and the status of the matter. This table also lists those cases
which were dismissed during the most recent fiscal quarter. Cases that were dismissed in prior
fiscal quarters are not included in this table. In each of the pending lawsuits, the plaintiff is
seeking monetary damages from the Company. The defense of each of these lawsuits has been submitted
to our insurance carriers that maintained insurance coverage during these applicable periods and we
continue to maintain product liability insurance coverage with varying limits and deductibles. Our
product liability insurance coverage during these periods ranged from $5,000,000 to $10,000,000 in
coverage limits and from $10,000 to $250,000 in per incident deductibles. We are defending each of
these lawsuits vigorously.
17
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
|
|
|
|
|
|
|
|
|
|
|
Month |
|
|
|
|
|
|
Plaintiff |
|
Served |
|
Jurisdiction |
|
Claim Type |
|
Status |
|
Alvarado
|
|
4/2003
|
|
CA Superior Court
|
|
Wrongful Death
|
|
Trial Scheduled for October 2006 |
City of Madera
|
|
6/2003
|
|
CA Superior Court
|
|
Wrongful Death
|
|
Dismissed by Summary Judgment, Appeal Pending |
Thompson
|
|
9/2004
|
|
MI Circuit Court
|
|
Wrongful Death
|
|
Dismissed |
Pierson
|
|
11/2004
|
|
US District Court, CD CA
|
|
Wrongful Death
|
|
Discovery Phase |
Glowczenski
|
|
10/2004
|
|
US District Court, ED NY
|
|
Wrongful Death
|
|
Case Stayed |
LeBlanc
|
|
12/2004
|
|
US District Court, CD CA
|
|
Wrongful Death
|
|
Discovery Phase |
M. Elsholtz
|
|
12/2004
|
|
TX District Court
|
|
Wrongful Death
|
|
Discovery Phase |
Washington
|
|
5/2005
|
|
US District Court, ED CA
|
|
Wrongful Death
|
|
Discovery Phase |
Sanders
|
|
5/2005
|
|
US District Court ED CA
|
|
Wrongful Death
|
|
Discovery Phase |
Fleming
|
|
5/2005
|
|
US District Court ED LA
|
|
Wrongful Death
|
|
Trial Scheduled for November 2006 |
Woolfolk
|
|
6/2005
|
|
US District Court MD FL
|
|
Wrongful Death
|
|
Trial Scheduled for March 2007. |
Graff
|
|
9/2005
|
|
AZ Superior Court
|
|
Wrongful Death
|
|
Discovery Phase |
Holcomb
|
|
9/2005
|
|
US District Court, ND OH
|
|
Wrongful Death
|
|
Discovery Phase |
Tucker
|
|
10/2005
|
|
US District Court, NV
|
|
Wrongful Death
|
|
Discovery Phase |
Hammock
|
|
10/2005
|
|
District Court, Tarrant County, TX
|
|
Wrongful Death
|
|
Dismissed with Prejudice |
Heston
|
|
11/2005
|
|
US District Court, ND CA
|
|
Wrongful Death
|
|
Discovery Phase |
Rosa
|
|
11/2005
|
|
US District Court, ND CA
|
|
Wrongful Death
|
|
Discovery Phase |
Gosserand
|
|
10/2005
|
|
US District Court, ED LA
|
|
Wrongful Death
|
|
Discovery Phase |
ODonnell/Hasse
|
|
11/2005
|
|
Circuit Court, Cook County, IL
|
|
Wrongful Death
|
|
Discovery Phase |
Yeagley
|
|
11/2005
|
|
Hillsborough County Circuit Court, FL
|
|
Wrongful Death
|
|
Discovery Phase |
Neal-Lomax
|
|
12/2005
|
|
US District Court, NV
|
|
Wrongful Death
|
|
Discovery Phase |
Yanga Williams
|
|
12/2005
|
|
Gwinnett County State Court, GA
|
|
Wrongful Death
|
|
Discovery Phase |
Mann
|
|
12/2005
|
|
US District Court, ND GA, Rome Div
|
|
Wrongful Death
|
|
Discovery Phase |
King
|
|
12/2005
|
|
US District Court, MD FL, Jacksonville
|
|
Wrongful Death
|
|
Discovery Phase |
Robert Williams
|
|
1/2006
|
|
US District Court, TX
|
|
Wrongful Death
|
|
Discovery Phase |
Lee
|
|
1/2006
|
|
Davidson County, TN Circuit Court
|
|
Wrongful Death
|
|
Discovery Phase, Trial Scheduled for June 2008. |
Zaragoza
|
|
2/2006
|
|
CA Superior Court, Sacramento County
|
|
Wrongful Death
|
|
Discovery Phase |
Tapia
|
|
4/2006
|
|
CA Superior Court, Los Angeles County
|
|
Wrongful Death
|
|
Discovery Phase |
Kinkle
|
|
6/2006
|
|
US District Court, ND MS
|
|
Wrongful Death
|
|
Complaint Served |
Nunez
|
|
6/2006
|
|
72nd District Court, Lubbock County, TX
|
|
Wrongful Death
|
|
Complaint Served |
Bagnell
|
|
7/2006
|
|
Supreme Court for British Columbia, Canada
|
|
Wrongful Death
|
|
Complaint Served |
Salazar
|
|
7/2006
|
|
Maricopa County Superior Court, AZ
|
|
Wrongful Death
|
|
Complaint Served |
Gillson
|
|
7/2006
|
|
US District Court, NV
|
|
Wrongful Death
|
|
Complaint Served |
Powers
|
|
11/2003
|
|
AZ Superior Court
|
|
Training Injury
|
|
Verdict for TASER, Appeal Pending |
Cook
|
|
8/2004
|
|
NV District Court
|
|
Training Injury
|
|
Discovery Phase |
Stevens
|
|
10/2004
|
|
OH Court Common Pleas
|
|
Training Injury
|
|
Dismissed with Prejudice |
Dimiceli
|
|
3/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Dismissed with Prejudice |
Allen
|
|
5/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Dismissed with Prejudice |
J.J
|
|
7/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Discovery Phase |
J.B
|
|
7/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Discovery Phase |
Howard
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase |
Wagner
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase |
Gerdon
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase |
Gallant
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase |
Herring
|
|
8/2005
|
|
Circuit Court of City of St. Louis, MO
|
|
Training Injury
|
|
Discovery Phase |
Stewart
|
|
10/2005
|
|
Circuit Court for Broward County, FL
|
|
Training Injury
|
|
Discovery Phase |
Lewandowski
|
|
1/2006
|
|
US District Court, NV
|
|
Training Injury
|
|
Discovery Phase |
Peterson
|
|
1/2006
|
|
US District Court, NV
|
|
Training Injury
|
|
Discovery Phase |
Husband
|
|
3/2006
|
|
British Columbia Supreme Court, Canada
|
|
Training Injury
|
|
Discovery Phase |
Wright
|
|
4/2006
|
|
Court of Common Pleas, Clinton County Ohio
|
|
Training Injury
|
|
Discovery Phase |
Howard
|
|
4/2006
|
|
US District Court, KS (Companion to AZ lawsuit)
|
|
Training Injury
|
|
Dismissed |
Richthofen
|
|
7/2006
|
|
22nd Judicial District Court, St. Tammany Parish, LA
|
|
Training Injury
|
|
Complaint Served |
Cosby
|
|
8/2004
|
|
US District Court, SD NY
|
|
Injury During Arrest
|
|
Discovery Phase |
Blair
|
|
3/2005
|
|
US District Court, MD NC
|
|
Injury During Detention
|
|
Dismissed with Prejudice |
Lewis
|
|
7/2005
|
|
US District Court Tal FL
|
|
Injury During Arrest
|
|
Dismissed with Prejudice |
Lash
|
|
8/2005
|
|
US District Court ED MO
|
|
Injury During Arrest
|
|
Dismissed with Prejudice |
Games
|
|
8/2005
|
|
Circuit Court, Multnomah County, OR
|
|
Injury During Arrest
|
|
Dismissed with Prejudice |
Bynum
|
|
10/2005
|
|
US District Court SD NY
|
|
Injury During Arrest
|
|
Discovery Phase |
Lopez
|
|
11/2005
|
|
US District Court, ND IL Eastern Div
|
|
Injury During Police Call
|
|
Discovery Phase |
Bellemore
|
|
2/2006
|
|
AZ Superior Court
|
|
Injury During Arrest
|
|
Discovery Phase |
Wieffenbach
|
|
6/2006
|
|
Circuit Court of 12th Judicial District, Will County, Il
|
|
Injury During Arrest
|
|
Complaint Served |
Cruz
|
|
7/2006
|
|
CA Superior Court, Los Angeles County
|
|
Injury During Arrest
|
|
Complaint Served |
18
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
In
December 2005, the Company received a defense verdict in the Samuel Powers v. TASER International personal
injury case. As part of its legal strategy to aggressively defend these cases, the Company entered
into a settlement agreement with its own insurance provider in order to prevent its insurance
provider from settling the case with the plaintiff. Under the terms of the settlement, the Company
received $575,000 from its liability insurance provider associated with a settlement and release
agreement and the Company assumed all future potential liability and costs from and after the date
the settlement and release agreement was signed. After offsetting approximately $100,000 in legal
expenses to defend and win the trial, the Company has recorded the remaining balance of
approximately $475,000 as deferred income on its balance sheet. This deferred income will be used
to cover any costs through all appeals and the remaining balance if any will be recorded as other
income when final resolution is completed. During the three and six month period ended June 30,
2006, the Company expended approximately $3,000 and $37,000, respectively, in connection with the appeal and
reduced the deferred amount by these costs.
Other Litigation
In January 2005, we filed litigation in U.S. District Court for the Western District of North
Carolina against Stinger Systems, Inc. and Robert Gruder alleging false advertising and a violation
of the Lanham Act. The defendants have filed a counterclaim against the Company alleging
defamation. This case is in the discovery phase and no trial date has been set.
In February 2005, we filed litigation in Superior Court for Maricopa County against Thomas G.
Watkins III, our former patent attorney, for declaratory judgment, breach of fiduciary duty,
constructive fraud, and breach of contract. Mr. Watkins originally filed patent applications on our
behalf as our patent attorney for inventions utilized in the TASER X26 device in February and May
2003. In each patent application he filed a declaration stating that Magne Nerheim, our employee,
was the sole inventor. These patent applications are pending. Mr. Nerheim assigned his interest in
these patent applications to us. In December 2004 Mr. Watkins informed us that he now felt that he
was the inventor of a portion of this invention. We vigorously dispute his claim and we believe
that we are the sole owner of this invention. We have filed a motion for summary judgment in this
litigation in February 2006 which motion is pending before the Court. On February 14, 2006, U.S.
Patent No. US 6,999,295 entitled Dual Operating Mode Electronic Disabling Device For Generating A
Time-Sequenced, Shaped Voltage Output Waveform was issued to named inventors Thomas G. Watkins,
III and Mr. Nerheim. Mr. Nerheim assigned his interest in this patent to us. This patent covers a
portion of the technology utilized in the TASER X26 device. This patent was applied for by Mr.
Watkins without our knowledge or consent. Since we are a joint owner of this patent, this patent
will not restrict us from manufacturing and selling the TASER X26 device. We have other patent
applications pending that cover inventions contained in this patent.
In March 2006, the Court
issued a temporary restraining order and a preliminary injunction preventing Mr. Watkins from
selling, assigning, transferring or licensing this patent to a third party during the duration of
this litigation. On August 2, 2006 the Court issued an order
granting our motion for partial summary judgement on liability,
leaving open the matter of remedies and other residual issues for
resolution in subsequent proceedings.
In November 2005 and April 2006, we filed lawsuits in Marion County Circuit Court, Indiana and
in Fairfax County Circuit Court, Virginia, respectively, against James Ruggieri for defamation,
product disparagement, intentional interference with a business relationship, Lanham Act violations
and tortuously affecting the fairness and integrity of litigation as adverse third-party witness.
Mr. Ruggieri has counterclaimed for defamation and infliction of distress. This case is entering
the discovery phase and no trial date has been set.
In December 2005, we filed a lawsuit in Vigo County, Indiana, Superior Court against Roland M.
Kohr for defamation, product disparagement, Lanham Act violations, tortuously affecting the
fairness and integrity of litigation as adverse third-party witness, and intentional interference
with a business relationship. Dr. Kohr was the Medical Examiner and expert witness in the James
Borden wrongful death litigation which litigation was dismissed with prejudice. This case is in the
discovery phase and no trial date has been set.
In June 2006 we filed a lawsuit in U.S. District Court for the Central District of California
against Bestex Company, Inc. for patent infringement, false patent marking, unfair competition and
breach of written contract. Bestex filed a counterclaim for unfair competition and false
advertising. This case is entering the discovery phase and no trial date has been set.
General
From time to time, the Company is notified that it may be a party to a lawsuit or that a claim
is being made against it. It is the Companys policy to not disclose the specifics of any claim or
threatened lawsuit until the summons and complaint are actually served on the Company. We intend
to pursue and defend any lawsuit filed against or by the Company vigorously. Although we do not
expect the outcome in any individual case to be material, the outcome of any litigation is
inherently uncertain and there can be no assurance that any expense, liability and damages that may
ultimately result from the resolution of these matters will be covered by our insurance or will not
be in excess of amounts provided by insurance coverage and will not have a material adverse effect
on our business, operating results or financial condition. The
Company may settle a lawsuit in situations where
a settlement can be obtained for nuisance value and for an amount
which is expected to be less than the cost of defending a
lawsuit. Due to the confidentiality of our litigation strategy and the confidentiality agreements
that are executed in the event of a settlement, the Company will not identify or comment on which
lawsuits have been settled or the amount of any settlement.
19
TASER INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (unaudited) Continued
12. Related Party Transactions
Aircraft charter
Prior to 2006, the Company chartered an aircraft for business travel from Four Futures
Corporation, which is wholly-owned by Thomas P. Smith, President of the Company, and his family.
Beginning in 2006, the Company began reimbursing Thomas P. Smith for business use of his personal
aircraft. For the three and six months ended June 30, 2006, the Company incurred expenses of
approximately $119,000 and $202,000, respectively, to Thomas P. Smith and Four Futures Corporation.
For the three and six months ended June 30, 2005, the Company incurred expenses of approximately
$131,000 and $199,000, respectively, to Thomas P. Smith and Four Futures Corporation. Any personal
use of the aircraft by Mr. Smith prior to 2006 was billed to Four Futures Corporation for
reimbursement. At June 30, 2006 and December 31, 2005, the Company had outstanding payables of
approximately $46,000 and $67,000, respectively to Thomas P. Smith, and no amounts due from Thomas
P. Smith or Four Futures Corporation. The Company believes that the rates charged by Mr. Smith or
Four Futures Corporation are equal to or below commercial rates the Company would pay to charter
similar aircraft from independent charter companies.
Prior to 2006, the Company also chartered an aircraft for business travel from Thundervolt,
LLC, which is wholly owned by Patrick W. Smith, Chief Executive Officer of the Company, and
Phillips W. Smith, Chairman of the Companys Board. During January 2006, the Company ceased the charter of
this aircraft. For the three and six months ended June 30, 2005, the Company incurred charter
expenses of approximately $132,000 and $236,000, respectively, to Thundervolt, LLC. Any personal
use of the aircraft by Patrick, Phillip or Thomas Smith was billed to Thundervolt, LLC, or directly
to the individual, for reimbursement. For the three and six months ended June 30, 2005, the Company
billed approximately $76,000 and $175,000, to Thundervolt, LLC, Patrick W. Smith, Phillips W. Smith
and Thomas P. Smith for personal use of the aircraft. The Company believes that the rates charged
by Thundervolt, LLC were equal to or below commercial rates the Company would pay to charter
similar aircraft from independent charter companies.
The Company performed a review of the above relationships in accordance with the
provisions of Financial Accounting Standards Board Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46R). Neither of the
relationships were determined to meet the definition of a variable interest entity (VIE) as defined
by FIN 46R as both Four Futures Corporation and Thundervolt, LLC are adequately capitalized, their
owners possess all of the essential characteristics of a controlling financial interest, and the
Company does not have any voting rights in either entity. Therefore, the entities are not required
to be consolidated into the Companys results.
TASER Foundation
In November 2004, the Company established the TASER Foundation. The TASER Foundation is a
501(c)3 non-profit corporation and has made application to the IRS for tax exempt status. The TASER
Foundations mission is to honor the service and sacrifice of local and federal law enforcement
officers in the United States and Canada lost in the line of duty by providing financial support to
their families. Daniel M. Behrendt an officer of the Company serves on the Board of Directors of
the TASER Foundation. Patrick W. Smith and Thomas P. Smith resigned from the Board of Directors of
the TASER Foundation in January 2006. Over half of the initial $1 million endowment was contributed
directly by TASER International, Inc. employees. The Company bears all administrative costs of the
TASER Foundation in order to ensure 100% of all donations are distributed to the families of fallen
officers. For the three and six months ended June 30, 2006, the Company incurred approximately
$44,000 and $120,000, respectively in such administrative costs. For the three and six months ended
June 30, 2005, the Company incurred approximately $38,000 and $60,000, respectively in
administrative costs. For the three and six months ended June 30, 2006, the Company contributed $0
and $75,000 to the TASER Foundation. For the three and six months ended June 30, 2005, the Company
contributed $0 and $125,000 to the TASER Foundation
Consulting services
Beginning in August 2005, the Company agreed to pay Mark Kroll, a member of the Board of
Directors, a retainer of $8,000 per month to provide consultancy services. The cumulative expense
for the three and six months ended June 30, 2006 were approximately $65,000 and $109,000,
respectively. At June 30, 2006, the Company had accrued liabilities of approximately $21,000
related to these services.
13. Employee Benefit Plan
In January 2006, the Company established a defined contribution profit sharing 401(k) plan
(the Plan) for eligible employees, which is qualified under Sections 401(a) and 401(k) of the
Internal Revenue Code of 1986, as amended. Employees are entitled to make tax-deferred
contributions of up to the maximum allowed by law of their eligible compensation, but not exceeding
$15,000. The Company matches 50% of the first 6% of eligible compensation contributed to the Plan
by each participant. The Companys matching contributions vest after four years of service, at age
59 1/2 regardless of service, upon the death or permanent disability of the employee, or upon
termination of the Plan. The Companys matching contributions to the Plan for the three and six
months ended June 30, 2006 were $47,612 and $92,303, respectively. Future matching or profit
sharing contributions to the Plan are at the
Companys sole discretion.
14. Subsequent Event
Proposed Class Action and Derivative Lawsuit Settlement
On July 25, 2006, the Company participated in a mediation conference in an attempt to settle
the pending securities class action and shareholder derivative
lawsuits (See Note 11). Discussions continued and
the parties have reached a tentative settlement agreement. Under the tentative settlement,
defendants would provide the plaintiff class $20 million in exchange for a release of
all claims based on or arising out of the allegations in the consolidated complaint. The settlement
would be funded by approximately $4.5 million in cash provided by a Directors and Officers Liability
Insurance policy, of which $400,000 would be used to pay legal fees; approximately $7.9 million in cash funded by the Company;
and $8 million in the Companys common stock valued as of the date at which the stock is
transferred (941,176 shares, based on a closing market price of $8.50 at
July 25, 2006). The number of shares is subject to change based
on the market price of the Companys stock at the consummation of the settlement. At the Companys election the stock portion of the
settlement may be funded with cash. The settlement is
conditioned on agreement on the appropriate settlement documents; certification of the plaintiff
class; approval by the court; and other factors. There is no assurance that the settlement will be
completed. If the settlement is not completed, the parties may attempt to reach agreement on
another settlement, or resume the litigation.
We have also reached a tentative settlement agreement in the derivative lawsuits. Under the
proposed settlement, defendants would agree to certain measures to improve the Companys corporate
governance and pay a settlement fee of $1.75 million of the Companys common stock valued as of the
date at which the stock is transferred (205,882 shares, based
on a closing market price of $8.50 at July 25, 2006), in exchange for a release by plaintiffs of all claims based
on or arising out of the complaint. As part of the settlement, the Company anticipates that the
other derivative cases and the Section 220 of Delaware General Corporation Law case will be
dismissed. The settlements are conditioned on agreement on the appropriate settlement document,
approval by the Court, and other factors. There is no assurance that the settlement will be
completed. If the settlement is not completed, the parties may attempt to reach agreement on
another settlement, or resume the litigation.
As a result of the aforementioned proposed settlements, the Company has
established a litigation settlement liability of $21.75 million, recorded a receivable of
$4.5 million to reflect insurance proceeds, and recorded a liability of
approximately $400,000 for legal fees. The total litigation settlement expenses reflected in the
income statement for the three and six months ended June 30,
2006 are $17.65 million, which are net of insurance proceeds
after legal fees. The Company has tax effected the settlement
expenses in accordance with APB 28 and in addition has recorded
a valuation allowance of $250,000 against its state deferred tax assets as of June 30, 2006, since,
due to the settlements, management believes it is more likely than not that certain state net operating loss carryforwards will not be fully realized.
Stock
Repurchase
The Board
of Directors of TASER International, Inc. approved, in connection
with the approval of the settlement agreements, a resolution
authorizing the Company to purchase up to $10 million of the
Companys common stock between the current date and the date of
final payment of the shareholder class action settlement subject to
stock market conditions and corporate considerations. The final
payment of the settlement will take place after final court approval
of the formal shareholder class action settlement agreement, a
process expected to take several months.
20
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following is a discussion of the Companys financial condition and results of operations
for the three and six months ended June 30, 2006 and June 30, 2005. The following discussion may be
understood more fully by reference to the financial statements, notes to the financial statements,
and the Managements Discussion and Analysis of Financial Condition and Results of Operations
section contained in the Companys Annual Report on Form 10-K filed on March 16, 2006.
Certain statements contained in this report may be deemed to be forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995, and the Company intends that such
forward-looking statements be subject to the safe-harbor created thereby. Such forward-looking
statements may relate to, among other things: expected revenue and earnings growth; estimates
regarding the size of our target markets; successful penetration of the law enforcement market;
expansion of product sales to the private security, military and consumer self-defense markets;
growth expectations for new and existing accounts; expansion of production capability; new product
introductions; and our business model. We caution that these statements are qualified by important
factors that could cause actual results to differ materially from those reflected by the
forward-looking statements herein. Such factors include, but are not limited to: market acceptance
of our products; establishment and expansion of our direct and indirect distribution channels;
attracting and retaining the endorsement of key opinion-leaders in the law enforcement community;
the level of product technology and price competition for our products; the degree and rate of
growth of the markets in which we compete and the accompanying demand for our products; potential
delays in international and domestic orders; implementation risks of manufacturing automation;
risks associated with rapid technological change; execution and implementation risks of new
technology; new product introduction risks; ramping manufacturing production to meet demand;
litigation resulting from alleged product- related injuries; risks related to government inquiries
and pending class action and derivative litigation; media publicity concerning allegations of
deaths occurring after use of the TASER device and the negative impact this publicity could have on
sales; product quality risks; potential fluctuations in quarterly operating results; competition;
financial and budgetary constraints of prospects and customers; dependence upon sole and limited
source suppliers; fluctuations in component pricing; risks of governmental regulations; dependence
on a single product; dependence upon key employees; employee retention risks; and other factors
detailed in the Companys filings with the Securities and Exchange Commission including in
Part II Item 1A. Risk Factors in this report on Form 10-Q.
Overview
We are a global leader in the development and manufacture of advanced electronic control
devices designed for use in law enforcement, corrections, private security and personal defense. We
have focused our efforts on the continuous development of our technology for both new and existing
products as well as industry leading training services while building distribution channels for
marketing our products and services to law enforcement agencies, primarily in North America with
increasing efforts on expanding these programs with a view toward international markets.
Our core expertise includes proprietary, patented technology which is uniquely capable of
incapacitating highly focused and aggressive subjects. Competing non-lethal weapons rely primarily
on pain to dissuade subjects from continuing unwanted behavior. Our proprietary Neuro-Muscular
Incapacitation (NMI) technology uses electrical impulses to interfere with a subjects
neuron-muscular system, causing substantial incapacitation regardless of whether the subject feels
or responds to pain. Our NMI technology stimulates the motor nerves which control muscular
movement.
Law enforcement, military and corrections agencies represent our primary target markets. In
each of these markets, the decision to purchase TASER devices is normally made by a group of people
including the agency head, his or her training staff, and weapons experts. Depending on the size
and cost of the device deployment, the decision may involve political decision-makers such as city
council members and the federal government. The decision making process can take as little as a few
weeks or as long as several years.
21
Our devices are not considered to be a firearm by the U.S. Bureau of Alcohol, Tobacco,
Firearms and Explosives. Therefore, no firearms-related regulations apply to the sale and
distribution of our devices within the United States. However, many states have regulations
restricting the sale and use of stun guns, which we believe apply to our devices as well. Our
products are often used in aggressive confrontations that may result in serious, permanent bodily
injury or death to those involved. Our products may cause or be associated with these injuries. A
person injured in a confrontation or otherwise in connection with the use of our products may bring
legal action against us to recover damages on the basis of theories including personal injury,
wrongful death, negligent design, dangerous product or inadequate warning. We are currently subject
to a number of such lawsuits. We may also be subject to lawsuits involving allegations of misuse of
our products. If successful, personal injury, misuse and other claims could have a material adverse
effect on our operating results and financial condition. Although we carry product liability
insurance, significant litigation could also result in a diversion of managements attention and
resources, negative publicity and an award of monetary damages in excess of our insurance coverage.
The outcome of any litigation is inherently uncertain and there can be no assurance that our
existing or any future litigation will not have a material adverse effect on our revenues, our
financial condition or financial results.
Critical Accounting Policies
The preparation of this Quarterly Report on Form 10-Q
requires us to make estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the reporting period. There can
be no assurance that actual results will not differ from those estimates. We have identified the following policies as critical to our business operations and the
understanding of our results of operations.
Revenue Recognition
Our revenue recognition policy is significant because our revenue is a key component of our
results of operations. We recognize revenues when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, title has transferred, the price is fixed and
collectability is reasonably assured. All of our sales are final and our customers do not have a
right to return the product. We charge certain of our customers shipping fees, which are recorded
as a component of net sales. We record training revenue as the service is provided. In 2003, we
began offering our customers the right to purchase extended warranties on our ADVANCED TASER
product and TASER X26 product. Revenue for extended warranty purchases is deferred at the time of
sale, and recognized over the warranty period. At June 30, 2006 and December 31, 2005, $1,716,000
and $1,233,000 was deferred under this program, respectively. We also defer revenue associated with
the one-on-one private citizen training and background checks that are included with the purchase
of an X26 C private citizen device. The revenue associated with these items is
deferred until the service is provided. At June 30, 2006 and December 31, 2005, we had deferred
approximately $171,000 and $150,000, respectively, relating to these
items and another $18,000 at December 31, 2005 relating to the training of federal firearms licensed dealers who will sell the
X26 C device. Changes in judgments on these assumptions and estimates could
impact the timing or amount of our revenue recognition.
Standard Warranty Costs
We warrant our products from manufacturing defects for a period of one year after purchase and
will replace any defective unit with a new one for a fee. We track historical data related to
returns and related warranty costs on a quarterly basis, and estimate future warranty claims by
applying our four quarter average return rate to our product sales for the period. We have also
historically increased our reserve amount if we become aware of a component failure that could
result in larger than anticipated returns from our customers. As of June 30, 2006, our reserve for
warranty returns was $748,000 compared to a $852,000 reserve at December 31, 2005. In the event
that product returns under warranty differ from these estimates, changes to our warranty reserves might
become necessary.
Inventory
Inventories are stated at the lower of cost or market, with cost determined using the weighted
average cost, which approximates the first-in, first-out (FIFO) method. Provisions are made to
reduce potentially excess, obsolete or slow-moving inventories to their net realizable value. These
provisions are based on our best estimates after considering historical demand, projected future
demand, inventory purchase commitments, industry and market trends and conditions and other
factors. In the event that actual excess, obsolete or slow-moving inventories differ from these
estimates, changes to our inventory reserves might become necessary.
Accounts Receivable
Sales are typically made on credit and we generally do not require collateral. We perform
ongoing credit evaluations of our customers financial condition and maintain an allowance for
estimated potential losses. Uncollectible accounts are written off when deemed uncollectible, and
accounts receivable are presented net of an allowance for doubtful accounts. These allowances
represent our best estimates and are based on our judgment after considering a number of factors
including third-party credit reports, actual payment history, customer-specific financial
information and broader market and economic trends and conditions. In the event that actual
uncollectible amounts differ from these estimates, changes in our allowances for doubtful accounts
might become necessary.
22
Valuation of Long-lived Assets
We review long-lived assets, such as property and equipment and intangible assets subject to
amortization, whenever events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. We utilize a two-step approach to testing long-lived assets for
impairment. The first step tests for possible impairment indicators. If an impairment indicator is
present, the second step measures whether the asset is recoverable based on a comparison of the
carrying amount of the asset to the estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Our review requires the use of judgment and estimates. No such
impairment charges have occurred to date. However, future events or circumstances may result in a
charge to earnings if we determine that the carrying value of a long-lived asset is not
recoverable.
Income Taxes
Statement of Financial Accounting Standards No. 109, or SFAS No. 109, Accounting for Income
Taxes, establishes financial accounting and reporting standards for the effect of income taxes. In
accordance with SFAS No. 109, we recognize federal, state and foreign current tax liabilities or
assets based on our estimate of taxes payable or refundable in the current fiscal year by tax
jurisdiction. We also recognize federal, state and foreign deferred tax assets or liabilities, as
appropriate, for our estimate of future tax effects attributable to temporary differences and
carryforwards.
Our calculation of current and deferred tax assets and liabilities is based on certain
estimates and judgments and involves dealing with uncertainties in the application of complex tax
laws. Our estimates of current and deferred tax assets and liabilities may change based, in part,
on added certainty or finality to an anticipated outcome, changes in accounting or tax laws in the
United States, or changes in other facts or circumstances. In addition, we recognize liabilities
for potential United States tax contingencies based on our estimate of whether, and the extent to
which, additional taxes may be due. If we determine that payment of these amounts is unnecessary or
if the recorded tax liability is less than our current assessment, we may be required to recognize
an income tax benefit or additional income tax expense in our financial statements.
In preparing our financial statements, we assess the likelihood that our deferred tax assets
will be realized from future taxable income. In evaluating our ability to recover our deferred
income tax assets we consider all available positive and negative evidence, including our operating
results, ongoing tax planning and forecasts of future taxable income. We establish a valuation
allowance if we determine that it is more likely than not that some portion or all of the net
deferred tax assets will not be realized. We exercise significant judgment in determining our
provisions for income taxes, our deferred tax assets and liabilities and our future taxable income
for purposes of assessing our ability to utilize any future tax benefit from our deferred tax
assets. Although we believe that our tax estimates are reasonable, the ultimate tax determination
involves significant judgments that could become subject to audit by tax authorities in the
ordinary course of business. As a result of the shareholder
litigation settlement expense recorded for the three and six months ended June 30, 2006 (see footnote 14 to the financial
statements), we have determined that it is more likely than not that
our net operating loss carryforwards for the state of Arizona, which
expire in 2009, will not be fully realized. Accordingly, we have
recorded a valuation allowance of $250,000, against our deferred tax
assets as of June 30, 2006. As of June 30, 2006, other than as
previously described, based on our evaluation, no other valuation allowance
was deemed necessary as it is more likely than not that our net deferred tax assets will be
realized. However, our deferred tax asset could be reduced in the near term if estimates of taxable
income during the carryforward period are reduced.
Contingencies
We are subject to the possibility of various loss contingencies arising in the ordinary course
of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a
liability, as well as our ability to reasonably estimate the amount of loss in determining loss
contingencies. An estimated loss contingency is accrued when it is probable that an asset has been
impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We
regularly evaluate current information available to us to determine whether such accruals should be
adjusted and whether new accruals are required.
23
Results of Operations
Three and Six Months Ended June 30, 2006 Compared to the Three and Six Months Ended June 30, 2005
The following table sets forth, for the periods indicated, our statements of income expressed as a
percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Net sales |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Cost of products sold |
|
|
36 |
% |
|
|
38 |
% |
|
|
36 |
% |
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
64 |
% |
|
|
62 |
% |
|
|
64 |
% |
|
|
59 |
% |
Sales, general and administrative expenses |
|
|
47 |
% |
|
|
54 |
% |
|
|
49 |
% |
|
|
54 |
% |
Research and development expenses |
|
|
3 |
% |
|
|
3 |
% |
|
|
4 |
% |
|
|
3 |
% |
Litigation
settlement expenses |
|
|
109 |
% |
|
|
0 |
% |
|
|
59 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations |
|
|
(95 |
)% |
|
|
5 |
% |
|
|
(48 |
)% |
|
|
2 |
% |
Interest income |
|
|
3 |
% |
|
|
2 |
% |
|
|
3 |
% |
|
|
2 |
% |
Interest expense |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Other income and expense |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes |
|
|
(92 |
)% |
|
|
7 |
% |
|
|
(45 |
)% |
|
|
4 |
% |
Provision
(credit) for income taxes |
|
|
(33 |
)% |
|
|
3 |
% |
|
|
(16 |
)% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) |
|
|
(59 |
)% |
|
|
4 |
% |
|
|
(29 |
)% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales.
For the three and six months ended June 30, 2006 and 2005, sales by product line and by
geography were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
2005 |
|
|
|
|
|
Sales by Product Line |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TASER X26 |
|
$ |
11,763 |
|
|
|
73 |
% |
|
$ |
7,842 |
|
|
|
59 |
% |
|
$ |
20,960 |
|
|
|
70 |
% |
|
$ |
14,405 |
|
|
|
62 |
% |
TASER Cam |
|
|
399 |
|
|
|
2 |
% |
|
|
|
|
|
|
0 |
% |
|
|
399 |
|
|
|
1 |
% |
|
|
|
|
|
|
0 |
% |
ADVANCED TASER |
|
|
743 |
|
|
|
5 |
% |
|
|
655 |
|
|
|
5 |
% |
|
|
1,438 |
|
|
|
5 |
% |
|
|
1,353 |
|
|
|
6 |
% |
AIR TASER |
|
|
37 |
|
|
|
0 |
% |
|
|
23 |
|
|
|
0 |
% |
|
|
66 |
|
|
|
0 |
% |
|
|
50 |
|
|
|
0 |
% |
Single Cartridges |
|
|
3,279 |
|
|
|
20 |
% |
|
|
4,409 |
|
|
|
34 |
% |
|
|
6,829 |
|
|
|
23 |
% |
|
|
6,842 |
|
|
|
29 |
% |
Research Funding |
|
|
|
|
|
|
0 |
% |
|
|
140 |
|
|
|
1 |
% |
|
|
146 |
|
|
|
0 |
% |
|
|
140 |
|
|
|
0 |
% |
Other |
|
|
4 |
|
|
|
0 |
% |
|
|
138 |
|
|
|
1 |
% |
|
|
281 |
|
|
|
1 |
% |
|
|
621 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,225 |
|
|
|
100 |
% |
|
$ |
13,207 |
|
|
|
100 |
% |
|
$ |
30,119 |
|
|
|
100 |
% |
|
$ |
23,411 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
For the Six Months Ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
United States |
|
|
88 |
% |
|
|
86 |
% |
|
|
90 |
% |
|
|
87 |
% |
Other Countries |
|
|
12 |
% |
|
|
14 |
% |
|
|
10 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased $3.0 million, or 23%, to $16.2 million for the second quarter of 2006 compared
to $13.2 million for the second quarter of 2005. For the first six months of 2006, net sales were
$30.1 million, an increase of $6.7 million or 29% over the same period in 2005. We believe the
principal reasons for the increases in net sales are related to us overcoming certain elements of
the various types of negative publicity we experienced during the course of 2005. Specifically, as
a result of an SEC investigation, ongoing negative press coverage and increased amounts of
litigation concerning our products and their use, prospective customers, particularly law
enforcement agencies, frequently postponed implementation decisions. With the resolution of key
portions of the SEC investigation in December 2005, we have noted that many of the agencies that
were postponing decisions are now moving forward with their evaluation and implementation programs
and decisions to purchase our products which had a positive impact on
our sales for both the second quarter and
first six months of 2006. Additionally, in June 2006 we commenced shipment of our first TASER
Cam production units following a BETA test and evaluation of field results. Sequentially, our net
sales for the second quarter of 2006 increased by $2.3 million, or 17%, over the first quarter of
2006.
24
Sales
of the TASER X26 product line increased $3.9 million to $11.7 million for the second
quarter of 2006 compared to $7.8 million for the second quarter of 2005. For the first six months
of 2006, sales of the TASER X26 product line were $21.0 million, an increase of $6.6 million or 47%
over the same period in 2005. Single cartridge sales decreased $1.1 million for the second quarter
of 2006 to $3.3 million compared to $4.4 million for the second quarter of 2005. The decrease is
attributable to a $1.4 million cartridge order placed by the U.S. Military which was shipped in May
2005. For the six month periods ended June 30, 2006 and 2005, cartridge sales remained flat at
$6.8 million. International sales for the second quarter and first six months of 2006 represented
approximately $1.9 million, or 12%, and $3.0 million, or 10%, of total net sales, respectively. This
compares to international sales for the second quarter and first six months of 2005 of $1.9
million, or 14% and $3.0 million, or 13%, of total net sales, respectively.
Grant funding from the Office of Naval Research (ONR) was $0 and $140,000 for the three months
ended June 30, 2006 and 2005, respectively. For the first six months of 2006 and 2005, the grant
funding was $146,000 and $140,000, respectively. We were awarded a grant for $515,000 in late 2004
to fund Phases 3 and 4 of the extended range projectile project for which the related work was
performed and revenue recognized in 2005 and the first quarter of 2006 based upon the completion of
specified milestones. We have fully billed the ONR for the work performed and received final
payment in the second quarter of 2006. Other sales represent shipping, training and warranty
revenues net of cash and distributor discounts.
Cost of Products Sold.
Cost of products sold increased by $819,000 and $1.1 million for the second quarter and first
six months of 2006 compared to the second quarter and first six months of 2005, respectively.
However, as a percentage of net sales, cost of products sold decreased to 36% of net sales for the
second quarter and first six months of 2006 compared to 38% and 41% of net sales for the second
quarter and first six months of 2005, respectively. The decreases in cost of products sold as a
percentage of sales for both the second quarter and first six months of 2006 are attributable to improved
production throughput and lower scrap expense. Specifically, on one X26 assembly line, production
yield improved from approximately 69% in the first quarter of 2005 to greater than 98% for
the first six months of 2006. In addition, the increased volume of device sales in 2006 resulted in
a larger number of units over which to apply indirect manufacturing expenses, resulting in lower
per unit costs and, to a lesser extent, the reduced concentration of lower margin cartridge sales in
the second quarter of 2006 contributed to the decreased cost of products sold as a percentage
of sales. Indirect expenses primarily include indirect salaries for manufacturing support
personnel, scrapped materials, freight, supplies and depreciation.
Gross Margin.
Gross
margin increased $2.2 million, or 27%, to $10.4 million for the second quarter of 2006
compared to $8.2 million for the first quarter of 2005. As a percentage of net sales, gross margins
increased to 64% for the second quarter of 2006 compared to 62% for the second quarter of 2005.
Gross margin increased $5.5 million, or 41%, to $19.3 million for the first six months of 2006
compared to $13.8 million for the first six months of 2005. As a percentage of net sales, gross
margin increased to 64% for the first half of 2006 compared to 59% for the first half of 2005.
These increases were due to the lower cost of sales per unit and improved production yields as
discussed above.
Sales, General and Administrative Expenses.
For the three and six months ended June 30, 2006 and 2005, sales, general and administrative
expenses were comprised as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Change |
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Change |
|
Salaries and
benefits |
|
$ |
1,373 |
|
|
$ |
1,087 |
|
|
$ |
286 |
|
|
|
26.3 |
% |
|
$ |
2,803 |
|
|
$ |
2,291 |
|
|
$ |
512 |
|
|
|
22.3 |
% |
Legal
expenses |
|
|
1,176 |
|
|
|
885 |
|
|
|
291 |
|
|
|
32.9 |
% |
|
|
2,336 |
|
|
|
1,911 |
|
|
|
425 |
|
|
|
22.3 |
% |
Professional, consulting and lobbying fees |
|
|
1,270 |
|
|
|
1,376 |
|
|
|
(106 |
) |
|
|
-7.7 |
% |
|
|
2,494 |
|
|
|
2,082 |
|
|
|
412 |
|
|
|
19.8 |
% |
Travel and meals |
|
|
961 |
|
|
|
949 |
|
|
|
12 |
|
|
|
1.3 |
% |
|
|
1,630 |
|
|
|
1,543 |
|
|
|
87 |
|
|
|
5.6 |
% |
D&O and liability insurance |
|
|
530 |
|
|
|
392 |
|
|
|
138 |
|
|
|
35.2 |
% |
|
|
1,062 |
|
|
|
784 |
|
|
|
278 |
|
|
|
35.5 |
% |
Depreciation
and amortization |
|
|
340 |
|
|
|
284 |
|
|
|
56 |
|
|
|
19.7 |
% |
|
|
682 |
|
|
|
456 |
|
|
|
226 |
|
|
|
49.6 |
% |
Stock-based compensation |
|
|
233 |
|
|
|
|
|
|
|
233 |
|
|
|
100.0 |
% |
|
|
500 |
|
|
|
|
|
|
|
500 |
|
|
|
100.0 |
% |
Other |
|
|
1,720 |
|
|
|
2,137 |
|
|
|
(417 |
) |
|
|
-19.5 |
% |
|
|
3,350 |
|
|
|
3,451 |
|
|
|
(101 |
) |
|
|
-2.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,603 |
|
|
$ |
7,110 |
|
|
$ |
493 |
|
|
|
6.9 |
% |
|
$ |
14,857 |
|
|
$ |
12,518 |
|
|
$ |
2,339 |
|
|
|
18.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, general and administrative as % of net sales |
|
|
47 |
% |
|
|
54 |
% |
|
|
|
|
|
|
|
|
|
|
49 |
% |
|
|
54 |
% |
|
|
|
|
|
|
|
|
25
Sales, general and administrative expenses were $7.6 million and $7.1 million in the
second quarter of 2006 and 2005, respectively, an increase of $0.5 million, or 7% from the 2005 period to the 2006 period. As a percentage
of total net sales, sales, general and administrative expenses decreased to 47% for the second
quarter of 2006 compared to 54% for the second quarter of 2005. The dollar increase for the second
quarter of 2006 over the same period in 2005 is substantially attributable to continuing costs
incurred by us in order to defend against numerous litigation matters. Specifically, legal expenses increased by $291,000 in the
second quarter of 2006 compared to the 2005 period. Additionally, salaries and benefits increased by $286,000 related to an
increase in personnel to support the expansion of our business infrastructure and D&O and liability
insurance costs went up $138,000 due to increased premiums. These increases were partially
offset by a decrease in professional, consulting and lobbying fees of $106,000 and other sales, general and administrative expenses of $417,000 including a
$222,000 decrease in investor relations costs and a $101,000 reduction in advertising expense.
Sales, general and administrative expenses were $14.9 million and $12.5 million for the first
half of 2006 and 2005, respectively, an increase of $2.4 million, or 19% from the 2005 period to the 2006 period. As a percentage of total
net sales, sales, general and administrative expenses decreased to 49% for the first six months of
2006 compared to 54% for same period in 2005. The dollar increase for the first six months of 2006
compared to the first six months of 2005 is primarily due to a $837,000 increase in legal,
professional, consulting and lobbying fees associated with the continuing costs of defending
against numerous litigation matters and our ongoing efforts via public relations and lobbying to
educate the public in regard to the safety and efficacy of our products. In addition, salaries and benefits increased by $512,000
related to the expansion of our infrastructure to support our business,
D&O and liability insurance costs went up by
$278,000 as a result of increased premiums, and
depreciation expense increased $226,000 with our new facility and related equipment
which were not placed into service until April 2005.
Also included in sales, general and administrative expenses for the second quarter and first
six months of 2006 are $233,000 and $500,000, respectively, of stock-based compensation costs
associated with our adoption of SFAS 123(R), effective January 1, 2006.
Research and Development Expenses.
Research and development expenses increased $167,000, or 42%, to $563,000 for the second
quarter of 2006 compared to $396,000 for the second quarter of 2005. Research and development
expenses increased $484,000, or 65%, to $1.2 million, for the first six months of 2006 compared to
$743,000 for the first six months of 2005. The increase on both a quarterly and six month basis
is predominantly related to growth in salary and supply costs to support our continuing efforts to
develop new products such as the TASERCam and the XREP (Extended Range Electro-Muscular
Projectile). Additionally, $48,000 and $111,000 of the increase in research and development
expenses for the second quarter and first six months of 2006 is related to stock-based compensation
expense recognized in those periods.
Litigation
settlement expenses.
Litigation settlement expense of $17.65 million was recorded in the second quarter of 2006 as a result of an agreement in principle for the proposed settlement of shareholder class action litigation and derivative lawsuits.
Interest Income.
Interest
income increased $83,000, or 24%, to $431,000 for the second quarter of 2006 compared
to $348,000 for the second quarter of 2005. Interest income increased
$251,000, or 46%, to $798,000
for the first half of 2006 compared to $547,000 for the first half of 2005. The increase on both a
quarterly and six month basis is primarily the result of higher average
yields on our investments. Our cash and investment accounts earned interest at
an approximate average rate of 3.64% and 3.47% during the second quarter and first six months of
2006, respectively, compared to 3.02% and 2.3% during the second quarter and first six months of
2005, respectively.
Income Taxes.
The provision for income taxes decreased by $5.9 million from $477,000 for the second quarter
of 2005 to a credit for income taxes of $5.4 million for the second quarter of 2006 and by $5.3 million from $480,000 for the first six months of 2005 to a credit for income taxes of $4.8 million
for the first six months of 2006. The decreases are the result of the losses before provision
for income taxes of $15.0 million and $13.6 million for the three and six months ended June 30,
2006, respectively which were substantially generated by the shareholder litigation expense of
$17.65 million recorded in the second quarter of 2006, as previously discussed. The effective
income tax rate for the second quarter and first six months of 2006 was 35.9% and 35.3%,
respectively, compared to 49% and 48.9% for the second quarter and first six months of 2005,
respectively.
The net deferred tax asset as of June 30, 2006 totaled $31.9 million compared to $27.0 million
at December 31, 2005.
Net Income (Loss).
Net income decreased by $10.1 million from $497,000 for the second quarter of 2005 to a net loss of
$9.6 million for the second quarter of 2006. Net income decreased by $9.3 million from $503,000 for
the first six months of 2005 to a net loss of $8.8 million for the first six months of 2006. The
decreases in net income on both a quarterly and six month basis resulted primarily from the
litigation settlement expense of $17.65 million recorded in the second quarter of 2006. The
increase in sales volume and the associated gross margins, were also partially offset by the increased
spending for selling general and administrative and research and development expenses as discussed
above. Income per basic and diluted share decreased from $0.01 for the second quarter of 2005 to a
loss of $0.15 for the second quarter of 2006 and from $0.01 for the first six months of 2005 to a
loss of $0.14 for the first six months of 2006.
26
Liquidity and Capital Resources
Liquidity.
As
of June 30, 2006, we had working capital of $22.2 million compared to working capital of
$34.7 million at December 31, 2005.
During the six months ended June 30, 2006, we generated $6.1 million of cash from operations
compared to $0.7 million used by operations for the same period in 2005. The increase in cash
provided by operations was primarily due to $0.7 million of stock based compensation expense, a
$0.3 million increase in depreciation and amortization expense and other net changes in operating
assets and liabilities, primarily consisting of $17.65 million of shareholder litigation settlement
provision. These increases were partially offset by the decrease in net income from $0.5 million
for the six months ended June 30, 2005 to a net loss of $8.8 million for the same period in 2006
and a net increase in deferred tax assets of $5.0 million related to net operating loss
carryforwards generated in the six months ended June 30, 2006.
Net
cash provided by operating activities for the first six months of
2006 was mainly comprised of a decrease in prepaid expenses and other
assets of $1.5 million primarily due to the payment of
$0.5 million of government grant funding and the amortization of
prepaid liability insurance premiums, depreciation and amortization
expense of $1.0 million, stock based compensation expense of
$0.7 million and a decrease in inventory of $0.5 million
attributable to increased sales of finished goods and our ongoing
efforts to reduce our investment in inventory. Primarily due to the
net shareholder litigation settlement of $17.65 million recorded
in the second quarter of 2006, these items were partially offset by a
net loss of $8.8 million, a net increase in deferred income
taxes of $4.9 million from the associated net operating loss
carryforwards and a net increase of $3.9 million in related insurance
settlement proceeds receivable. Also offsetting the cash provided by
operations was an increase in accounts receivable of
$2.4 million attributable to the increased sales levels of our
X26 units and single cartridges in the second quarter.
As
previously discussed in note 11 to the financial statements,
we have reached a tentative agreement to settle the
shareholder class action and derivative lawsuits. The terms of the
agreement call for us to pay approximately $12 million
of cash, $4.1 of which will be provided by insurance. In addition,
we will make a final payment of $8 million of stock or
cash at our discretion. These payments are expected to be made in the
next six months. In addition, our Board has approved, in connection
with the settlement, a stock repurchase of up to $10 million
subject to stock market conditions and corporate considerations. We
expect to fund the projected settlement payments from existing cash
balances and cash generated from operations.
We used $7.3 million of cash in investing activities during the six months ended June 30,
2006, compared to $2.0 million of cash provided by investing activities for the same period in
2005. Net cash used in investing activities for the six months ended June 30, 2006 was comprised of net
increases in our investments of $6.2 million combined with $1.0 million in acquisitions of property and
equipment, which mainly related to building improvements and production and office equipment. In
2005, proceeds from investments which matured in the first six months of $22.8 million were
partially offset by the purchase of other investments of $15.0 million and $5.7 million of
investments in property and equipment. Of the funds used in the acquisition of property and
equipment in the first six months of 2005, $4.1 million was used for the construction of our
manufacturing and administrative facility in Scottsdale, Arizona, $0.9 million was used for
production equipment and $0.7 million was used to purchase and install new computer equipment and
software, including investments associated with a new ERP system.
During the first half of 2006, we generated $0.2 million of cash from financing activities,
compared to $0.4 million generated from financing activities for the same period in 2005. The $0.2
million of cash generated from financing activities in 2006 was driven by proceeds from stock
options exercised compared to $0.4 million of proceeds from stock options exercised in the same
period of 2005.
Capital Resources.
On June 30, 2006, we had cash and investments of $49.1 million and $0.1 million of capital lease obligations outstanding.
We negotiated a revolving line of credit on July 13, 2004 through a domestic bank. The total
availability on the line is $10 million. The line is secured by substantially all of our assets,
other than intellectual property, and bears interest at varying rates, ranging from LIBOR plus 1.5%
to prime. The line of credit matures on June 30, 2008 and requires monthly payments of interest
only. At June 30, 2006, there was a calculated availability of $7.9 million based on the defined
borrowing base, which is based on our eligible accounts receivable and inventory. However, there
was no outstanding balance under the line of credit at June 30, 2006, and no borrowings under the
line as of the date of the filing of this Form 10-Q.
We believe that our existing balance of cash and investments of $49.1 million as of June 30,
2006, together with cash expected to be generated from operations, will be adequate to fund our
operations for at least the next 12 months. However, we may require additional resources to
expedite manufacturing of new and existing technologies in order to meet possible demand for our
products. Although we believe financing will be available at terms favorable to us, both through
our existing credit lines and possible additional equity financing, there is no assurance that such
funding will be available, or on terms acceptable to us.
Commitments and Contingencies.
Other
than as described in footnote 14. to the financial statements,
with respect to the proposed class action and derivative lawsuit
settlements, there have been no material changes in future contractual financial obligations as of June 30, 2006 compared to the information at December 31, 2005 set forth in our Annual Report on Form 10-K.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements as of June 30, 2006.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We invest in a limited number of financial instruments, consisting principally of investments
in high credit quality government sponsored entity securities, denominated in United States
dollars.
We account for our investment instruments in accordance with Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities , (SFAS No.
115 ). All of our cash equivalents and marketable securities are treated as held-to-maturity
under SFAS No. 115. Investments in fixed rate interest earning instruments carry a degree of
interest rate risk as their market value may be adversely impacted due to a rise in interest rates.
As a result we may suffer losses in principal if forced to sell securities that decline in market
value due to changes in interest rates. However, because we classify our debt securities as
held-to-maturity, no gains or losses are recognized due
to changes in interest rates and as such a 10% change in interest
rates would not have a material adverse affect on our results of operations. These
securities are reported at amortized cost, which approximates fair value.
Exchange Rate Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal.
Currently, sales to customers provide for pricing and payment in United States dollars, and
therefore are not subject to exchange rate fluctuations. To date, we have not engaged in any
currency hedging activities, although we may do so in the future. Fluctuations in currency exchange
rates could harm our business in the future.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, because there has been insufficient time in which to demonstrate the
consistent operational effectiveness of the remediation efforts related to the material weaknesses in
internal control over financial reporting as described below, our disclosure controls and
procedures were ineffective as of June 30, 2006 to ensure that information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is
recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms and (ii) is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Our disclosure controls and procedures are designed
to provide reasonable assurance that such information is accumulated and communicated to our
management. Our disclosure controls and procedures include components of our internal control over
financial reporting. Managements assessment of the effectiveness of our internal control over
financial reporting is expressed at the level of reasonable assurance because a control system, no
matter how well designed and operated, can provide only reasonable, but not absolute, assurance
that the control systems objectives will be met.
Status of Remediation Efforts with Respect to Previously Disclosed Material Weaknesses
i) Restatement of previously issued financial statements due to an error in those financial statements which resulted from the incorrect calculation of manufacturing overhead applied to inventory
On May 11, 2006, we concluded that our financial statements at March 31, 2005, June 30, 2005
and September 30, 2005 and for the periods then ended, included in our Form 10-Qs for such periods
should no longer be relied upon due to an error in those financial statements as we determined that
our historical methodology for the calculation of indirect manufacturing expense applied to
inventory was incorrect. We also identified a clerical error in the calculation of the overhead
applied to inventory for the three months ended December 31, 2005. We had historically been
calculating the rate used to capitalize overhead into inventory using an incorrect amount of direct
labor hours, the result of which was to overstate the rate used to capitalize overhead into
inventory which overstated both inventory and income. In addition, when reviewing the historical
overhead calculation, a formulaic spreadsheet error was identified in the calculations for the
fourth quarter of 2005. The effect of these errors on the our results was to reduce net income for
the year ended December 31, 2005 by approximately $6,000 and to increase net income for the three
months ended March 31, 2006 by approximately $113,000. The changes had no impact on revenues for
the periods.
As a result of these errors, adjustments were required to correct the cumulative impact both
in the first quarter of 2006 and in the relevant prior periods. We disclosed the impact of these
errors on the prior periods in footnote 3 to the financial statements included in Item 1 of our
Form 10-Q filed for the period ended March 31, 2006 and we have restated the June 30, 2005 balances in
this Form 10-Q. We will also be filing an amended Form 10-Q for the period ended September 30,
2005 to reflect the restated results. Since the errors were not previously identified in the prior
periods in which they occurred, a material weakness in our internal
controls was deemed to exist.
Management corrected the methodology for calculating indirect manufacturing expense applied to
inventory in the first quarter of 2006 and implemented additional procedures and controls
surrounding the preparation and review of the overhead calculation, including verification of
spreadsheet accuracy. We consulted with and advised our Audit Committee of our Board of Directors
of our determination.
Even though management
believes it has implemented remediation efforts as described above,
insufficient time has elapsed to demonstrate that the control is
consistently operating effectively to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
28
ii) Restatement of previously issued financial statements due to an error in those financial statements which resulted from the incorrect accrual of legal and other professional fees.
On November 14, 2005, we concluded that our financial statements at March 31, 2005 and June 30, 2005 and for the periods then ended, included in our Form 10-Qs for the periods ended March 31, 2005 and June 30, 2005, respectively, should no longer be relied upon due to an error in those financial statements which resulted from the incorrect accrual of
legal and other professional fees for those periods. As a result, certain invoices were recorded in the incorrect period. Correction of these errors resulted in shifting of expenses among the first three quarters of 2005 with expenses increasing in the first quarter of 2005 and decreasing in the second quarter of 2005 from the figures included in the previously filed Form 10-Qs. There was a corresponding decrease/increase in net income for the first and second quarters resulting from the change
in expenses. The restatement had no impact on revenues for the periods. Amended Forms 10-Q for the quarters ended March 31, 2005 and June 30, 2005 were filed to reflect the restatement.
With respect to the restatement described above, we determined that the errors resulted from an inadequate control over the accounting for our legal and other professional fees and under standards established by the Public Company Accounting Oversight Board constituted a material weakness in our internal controls over financial reporting. We consulted with and advised our Audit Committee of our Board of
Directors of our determination.
In response to this deficiency which resulted in the material weakness described above, our management took actions to enhance the operation and effectiveness of our internal controls and procedures to ensure that we properly account for our legal and other professional fees in the appropriate financial reporting period. These actions included reviewing each of the invoices submitted by firms that
provided legal and other professional services to us and contacting outside legal and professional firms to obtain copies of any invoice which had not been already paid to ensure that such amounts were recorded in the proper financial reporting period. In addition, we implemented additional accounting controls such as setting up a special email account for legal bills, preparing detailed analysis of legal and professional spending which will be reviewed monthly, and sending out quarterly
confirmations to outside legal firms to confirm balances owed for billed and unbilled services to help ensure that any such legal and other professional fees incurred in the future are properly recorded in the appropriate fiscal period.
Management believes that the remediation efforts implemented, as described above, are operating effectively.
iii)
Inadequate resources in accounting and financial statement preparation.
In
December 2005, we identified a material weakness in our internal control over financial reporting regarding inadequate resources with respect to accounting and financial statement preparation particularly related to financial statement footnote preparation. We do not believe that this deficiency resulted in any material errors in the reporting of our results of operations but we concluded that there was more than a
remote likelihood that a material misstatement of our annual or
interim financial statements would not be detected or prevented in the future, and therefore a material weakness in our internal controls was deemed to exist.
We consulted with and advised our Audit Committee of our Board of Directors of our determination.
In response to this deficiency which resulted in the material weakness described above, management engaged additional resources to assist with such activities by hiring a manager of external reporting.
Even
though management believes it has implemented remediation efforts as
described above, insufficient time has elapsed to demonstrate that
the control is consistently operating effectively to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
Changes in internal control over financial reporting.
Other than as noted above with respect to our remediation efforts, there has been no change in
our internal control over financial reporting during our quarter ended June 30, 2006 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
29
PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Securities Litigation
Securities Class Action Litigation
Beginning on or about January 10, 2005, numerous securities class action lawsuits were filed
against the Company and certain of its officers and directors. These actions were filed on behalf
of the purchasers of the Companys stock in various class periods, beginning as early as May 29,
2003 and ending as late as January 14, 2005. The majority of these lawsuits were filed in the
District of Arizona. Four actions were filed in the United States District Court for the Southern
District of New York and one in the Eastern District of Michigan. The New York and Michigan actions
were transferred to the District of Arizona. The class actions were consolidated by Judge Susan
Bolton and Lead Plaintiff and Lead Counsel were selected. The Lead Plaintiff filed a consolidated
complaint (which became the operative complaint for all of the class actions) on August 29, 2005.
The operative class period is May 29, 2003 to January 11, 2005. The defendants filed a motion to
dismiss the consolidated complaint, which has been fully briefed for the Court but has not yet been
decided.
The consolidated complaint alleges, among other things, violations of the Securities Exchange
Act of 1934, as amended, and Rule 10b-5, promulgated thereunder, and seeks unspecified monetary
damages and other relief against all defendants. The consolidated amended complaint generally
alleges that the Company and the individual defendants made false or misleading public statements
regarding, among other things, the safety of the Companys products and the Companys ability to
meet its sales goals, including the validity of a $1.5 million sales order with the Companys
distributor, Davidsons, in the fourth quarter of 2004. The consolidated complaint also alleges
that product defects were leading to excessive product returns by customers.
On
July 25, 2006, we participated in a mediation conference in an attempt to settle
the pending securities class action and shareholder derivative lawsuits. Discussions continued and
the parties have reached a tentative settlement agreement. Under the tentative settlement,
defendants would provide the plaintiff class $20 million in exchange for a release of
all claims based on or arising out of the allegations in the consolidated complaint. The settlement
would be funded by approximately $4.1 million in cash provided by a Directors and Officers Liability
Insurance policy; approximately $7.9 million in cash funded by the Company;
and $8 million in the Companys common stock valued as of the date at which the stock is
transferred (941,176 shares, based on a closing market price of
$8.50 at July 25, 2006). The number of shares is subject to change based on the market price of the Companys stock at the consummation of the settlement. At the Companys election the stock portion of the
settlement may be funded with cash. The settlement is
conditioned on agreement on the appropriate settlement documents; certification of the plaintiff
class; approval by the court; and other factors. There is no assurance that the settlement will be
completed. If the settlement is not completed, the parties may attempt to reach agreement on
another settlement, or resume the litigation.
Shareholder Derivative Litigation
Beginning on or about January 11, 2005, numerous shareholder derivative actions were also
filed against the Companys officers and directors. Such actions have been filed in the United
States District Court for the District of Arizona, the Arizona Superior Court in Maricopa County,
and the Delaware Chancery Court in New Castle County. The derivative actions pending in the Arizona
Superior Court and the Delaware Chancery Court have been stayed pending resolution of the
consolidated Arizona District Court action. The plaintiffs in the Arizona District Court action
filed a consolidated complaint on May 13, 2005. The Company and the individual defendants filed
motions to dismiss the consolidated complaint on August 19, 2005. On March 17, 2006, the Court
denied the motions to dismiss. Defendants answered the consolidated complaint on April 21, 2006.
Discovery has commenced and no trial date has been set.
The derivative complaints are based on similar facts and events as those alleged in the
securities class action complaints. The complaints generally allege that the individual defendants
breached the fiduciary duties that they owe to the Company and its shareholders by reason of their
positions as officers and/or directors of the Company. The complaints claim that such duties were
breached by defendants disclosure of allegedly false or misleading statements about the safety and
effectiveness of Company products and the Companys financial results. The complaints also claim
that fiduciary duties were breached by defendants alleged use of non-public information regarding
the safety of Company products and the Companys financial condition and future business prospects
to commit insider trading of the Companys stock. The derivative plaintiffs seek damages and
restitutionary, equitable, injunctive and other relief.
On
July 25, 2006, we participated in a mediation conference in an attempt to settle
the pending securities class action and shareholder derivative lawsuits. Discussions continued and
the parties have reached a tentative settlement agreement. Under the proposed settlement,
defendants would agree to certain measures to improve the Companys corporate governance and pay a
settlement fee of $1.75 million of the Companys common stock valued as of the date at which the
stock is transferred (205,882 shares, based on a closing market
price of $8.50 at July 25, 2006), in exchange for a release by plaintiffs of all claims based on or arising out
of the complaint. As part of the settlement, the Company anticipates that the other derivative
cases and the Section 220 of Delaware General Corporation Law case will be dismissed. The
settlement is conditioned on agreement on the appropriate settlement document, approval by the
Court, and other factors. There is no assurance that the settlement will be completed. If the
settlement is not completed, the parties may attempt to reach agreement on another settlement, or
resume the litigation.
Demand for Inspection of Documents Litigation
On May 4, 2005, a Company shareholder filed an action in the Delaware Chancery Court against
the Company under Section 220 of Delaware General Corporation Law, demanding the inspection of
certain corporate documents. The Company filed an answer to the complaint on June 7, 2005. The
plaintiff served discovery requests on February 14, 2006. In connection with the settlement of the federal derivative actions discussed above, the Company
anticipates that the Section 220 case will be dismissed. There is no assurance that the action
will be dismissed or settled.
30
Securities and Exchange Commission Investigation
In December 2004, the Company was informed that the staff of the Securities and Exchange
Commission had commenced an informal inquiry concerning the Companys public statements regarding
the safety and performance of the Companys products, certain disclosure issues and the accounting
for certain transactions. The Company voluntarily provided documents and information to the SEC
staff. In August 2005, the Company was informed that the staff of the SEC had initiated a formal
investigation as of June 20, 2005, regarding the Companys disclosures concerning the medical
safety of its products; the accounting and disclosure of certain transactions; and the unauthorized
acquisition of confidential information from the Company by persons outside the Company for the
possible purpose of manipulating the Companys stock. The Company provided additional information
at the request of the SEC staff. In December 2005, the SEC staff advised the Company that it had
completed its investigation into the Companys disclosures concerning the medical safety of the
Companys products; and into the accounting and disclosure issues. The SEC staff further advised
the Company that it had determined that it would not recommend that the Commission institute any
enforcement proceedings as to these matters. The SEC staff also advised the Company that it was
continuing to investigate issues relating to trading in the Companys stock. In May 2006, the SEC
staff advised the Company that the SEC investigation has been terminated in its entirety with no
recommendation for enforcement action.
Contract Litigation
In March 2000, Thomas N. Hennigan, a sales representative for our products from late 1997
through early 2000, sued the Company and certain of our shareholders in the United States District
Court, Southern District of New York. The Company previously sued him in February 2000 in the
United States District Court for the District of Arizona, but had not served him. After the New
York case was dismissed in February 2001 for lack of personal jurisdiction, Mr. Hennigan brought a
counterclaim in the United States District Court for the District of Arizona. Mr. Hennigan claims
the exclusive right to sell our products to many of the largest law enforcement, corrections, and
military agencies in the United States. He sought monetary damages that may amount to as much as
$500,000 against us allegedly arising in connection with his alleged service to the Company as a
distributor. His claims rest on theories of our failure to pay commissions, breach of contract,
promissory estoppel, breach of fiduciary duty, and on related theories. No written contract was
ever signed with Mr. Hennigan. We believe that he has no reasonable basis for claims based on
informal or implied contractual rights and will be unable to prove his damages with reasonable
certainty. Mr. Hennigan died in April 2001 and the case is now being prosecuted by his estate. On
May 24, 2002, H.A. Russell was permitted to proceed as an additional defendant-counterclaimant. We
filed various motions in November 2002 for partial summary judgment including a motion to dismiss
his claims. On September 30, 2003, the Court issued an order granting our motion for partial
summary judgment to dismiss Mr. Russells claims and struck Hennigans jury demand. On April 14,
2004, the Court issued an opinion partially granting our motion for partial summary judgment on
certain joint venture, post-termination, post-death and exclusivity claims. A pretrial conference
was held on July 28, 2005 and the trial started on August 31, 2005. At the conclusion of Hennigans
case in chief, we made a motion to dismiss Hennigans case. The court issued a briefing schedule on
our motion and the trial was suspended pending the courts
decision on our motion. On August 4, 2006 the Court issued an
opinion and order dismissing with prejudice all of plaintiffs
claims, except the Court set a briefing schedule for an alleged
remaining claim for $9,600.
In September 2004, the Company was served with a summons and complaint in the matter of Roy
Tailors Uniform Co., Inc. v. TASER International in which the plaintiff alleges that it is entitled
to commissions for disputed sales that were made to customers that are claimed to be plaintiffs
customers for which plaintiff is seeking monetary damages. Plaintiff failed to sign a distributor
agreement with the Company and did not have distribution rights with the Company. This case is in
the discovery phase and a trial date has been scheduled for April 2007.
Other Class Action Litigation
In August 2005, the Company was served with a summons and complaint in the matter of Village
of Dolton v. TASER International in which the Plaintiff alleges that defendant misled the plaintiff
about the safety of the TASER device when they purchased the TASER device and are seeking damages.
The plaintiff is seeking to certify the lawsuit as a class action. We have filed an answer to the
complaint and a motion to dismiss. In October 2005, we filed a declaration of the former chief of
police for the Village of Dolton which refutes many of the allegations made in the complaint and we
filed a motion for sanctions. In October 2005, the Court issued an order partially granting our
Motion to Dismiss, and denied the balance of the motions. The case is now moving forward with
discovery.
Product Liability Litigation
The
Company is currently named as a defendant in 50 lawsuits in which the plaintiffs alleged
either wrongful death or personal injury in situations in which the TASER device was used (or
present) by law enforcement officers or during training exercises. In
addition, 22 other
lawsuits have been dismissed and are not included in this number. Two
of the lawsuits that have been
dismissed or judgement entered in favor of TASER are on appeal. With
respect to each of these pending 50 lawsuits, the table below lists
the name of plaintiff, the date the Company was served with process, the jurisdiction in which the
case is pending, the type of claim and the status of the matter. This table also lists those cases
which were dismissed during the most recent fiscal quarter. Cases that were dismissed in prior
fiscal quarters are not included in this table. In each of the pending lawsuits, the plaintiff is
seeking monetary damages from the Company. The defense of each of these lawsuits has been submitted
to our insurance carriers that maintained insurance coverage during these applicable periods and we
continue to maintain product liability insurance coverage with varying limits and deductibles. Our
product liability insurance coverage during these periods ranged from $5,000,000 to $10,000,000 in
coverage limits and from $10,000 to $250,000 in per incident deductibles. We are defending each of
these lawsuits vigorously.
31
|
|
|
|
|
|
|
|
|
|
|
Month |
|
|
|
|
|
|
Plaintiff |
|
Served |
|
Jurisdiction |
|
Claim Type |
|
Status |
|
Alvarado
|
|
4/2003
|
|
CA Superior Court
|
|
Wrongful Death
|
|
Trial Scheduled for October 2006 |
City of Madera
|
|
6/2003
|
|
CA Superior Court
|
|
Wrongful Death
|
|
Dismissed by Summary Judgment, Appeal Pending |
Thompson
|
|
9/2004
|
|
MI Circuit Court
|
|
Wrongful Death
|
|
Dismissed |
Pierson
|
|
11/2004
|
|
US District Court, CD CA
|
|
Wrongful Death
|
|
Discovery Phase |
Glowczenski
|
|
10/2004
|
|
US District Court, ED NY
|
|
Wrongful Death
|
|
Case Stayed |
LeBlanc
|
|
12/2004
|
|
US District Court, CD CA
|
|
Wrongful Death
|
|
Discovery Phase |
M. Elsholtz
|
|
12/2004
|
|
TX District Court
|
|
Wrongful Death
|
|
Discovery Phase |
Washington
|
|
5/2005
|
|
US District Court, ED CA
|
|
Wrongful Death
|
|
Discovery Phase |
Sanders
|
|
5/2005
|
|
US District Court ED CA
|
|
Wrongful Death
|
|
Discovery Phase |
Fleming
|
|
5/2005
|
|
US District Court ED LA
|
|
Wrongful Death
|
|
Trial Scheduled for November 2006 |
Woolfolk
|
|
6/2005
|
|
US District Court MD FL
|
|
Wrongful Death
|
|
Trial Scheduled for March 2007. |
Graff
|
|
9/2005
|
|
AZ Superior Court
|
|
Wrongful Death
|
|
Discovery Phase |
Holcomb
|
|
9/2005
|
|
US District Court, ND OH
|
|
Wrongful Death
|
|
Discovery Phase |
Tucker
|
|
10/2005
|
|
US District Court, NV
|
|
Wrongful Death
|
|
Discovery Phase |
Hammock
|
|
10/2005
|
|
District Court, Tarrant County, TX
|
|
Wrongful Death
|
|
Dismissed with Prejudice |
Heston
|
|
11/2005
|
|
US District Court, ND CA
|
|
Wrongful Death
|
|
Discovery Phase |
Rosa
|
|
11/2005
|
|
US District Court, ND CA
|
|
Wrongful Death
|
|
Discovery Phase |
Gosserand
|
|
10/2005
|
|
US District Court, ED LA
|
|
Wrongful Death
|
|
Discovery Phase |
ODonnell/Hasse
|
|
11/2005
|
|
Circuit Court, Cook County, IL
|
|
Wrongful Death
|
|
Discovery Phase |
Yeagley
|
|
11/2005
|
|
Hillsborough County Circuit Court, FL
|
|
Wrongful Death
|
|
Discovery Phase |
Neal-Lomax
|
|
12/2005
|
|
US District Court, NV
|
|
Wrongful Death
|
|
Discovery Phase |
Yanga Williams
|
|
12/2005
|
|
Gwinnett County State Court, GA
|
|
Wrongful Death
|
|
Discovery Phase |
Mann
|
|
12/2005
|
|
US District Court, ND GA, Rome Div
|
|
Wrongful Death
|
|
Discovery Phase |
King
|
|
12/2005
|
|
US District Court, MD FL, Jacksonville
|
|
Wrongful Death
|
|
Discovery Phase |
Robert Williams
|
|
1/2006
|
|
US District Court, TX
|
|
Wrongful Death
|
|
Discovery Phase |
Lee
|
|
1/2006
|
|
Davidson County, TN Circuit Court
|
|
Wrongful Death
|
|
Discovery Phase, Trial Scheduled for June 2008. |
Zaragoza
|
|
2/2006
|
|
CA Superior Court, Sacramento County
|
|
Wrongful Death
|
|
Discovery Phase |
Tapia
|
|
4/2006
|
|
CA Superior Court, Los Angeles County
|
|
Wrongful Death
|
|
Discovery Phase |
Kinkle
|
|
6/2006
|
|
US District Court, ND MS
|
|
Wrongful Death
|
|
Complaint Served |
Nunez
|
|
6/2006
|
|
72nd District Court, Lubbock County, TX
|
|
Wrongful Death
|
|
Complaint Served |
Bagnell
|
|
7/2006
|
|
Supreme Court for British Columbia, Canada
|
|
Wrongful Death
|
|
Complaint Served |
Salazar
|
|
7/2006
|
|
Maricopa County Superior Court, AZ
|
|
Wrongful Death
|
|
Complaint Served |
Gillson
|
|
7/2006
|
|
US District Court, NV
|
|
Wrongful Death
|
|
Complaint Served |
Powers
|
|
11/2003
|
|
AZ Superior Court
|
|
Training Injury
|
|
Verdict for TASER, Appeal Pending |
Cook
|
|
8/2004
|
|
NV District Court
|
|
Training Injury
|
|
Discovery Phase |
Stevens
|
|
10/2004
|
|
OH Court Common Pleas
|
|
Training Injury
|
|
Dismissed with Prejudice |
Dimiceli
|
|
3/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Dismissed with Prejudice |
Allen
|
|
5/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Dismissed with Prejudice |
J.J
|
|
7/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Discovery Phase |
J.B
|
|
7/2005
|
|
FL Circuit Court
|
|
Training Injury
|
|
Discovery Phase |
Howard
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase |
Wagner
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase |
Gerdon
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase |
Gallant
|
|
8/2005
|
|
AZ Superior Court
|
|
Training Injury
|
|
Discovery Phase |
Herring
|
|
8/2005
|
|
Circuit Court of City of St. Louis, MO
|
|
Training Injury
|
|
Discovery Phase |
Stewart
|
|
10/2005
|
|
Circuit Court for Broward County, FL
|
|
Training Injury
|
|
Discovery Phase |
Lewandowski
|
|
1/2006
|
|
US District Court, NV
|
|
Training Injury
|
|
Discovery Phase |
Peterson
|
|
1/2006
|
|
US District Court, NV
|
|
Training Injury
|
|
Discovery Phase |
Husband
|
|
3/2006
|
|
British Columbia Supreme Court, Canada
|
|
Training Injury
|
|
Discovery Phase |
Wright
|
|
4/2006
|
|
Court of Common Pleas, Clinton County Ohio
|
|
Training Injury
|
|
Discovery Phase |
Howard
|
|
4/2006
|
|
US District Court, KS (Companion to AZ lawsuit)
|
|
Training Injury
|
|
Dismissed |
Richthofen
|
|
7/2006
|
|
22nd Judicial District Court, St. Tammany Parish, LA
|
|
Training Injury
|
|
Complaint Served |
Cosby
|
|
8/2004
|
|
US District Court, SD NY
|
|
Injury During Arrest
|
|
Discovery Phase |
Blair
|
|
3/2005
|
|
US District Court, MD NC
|
|
Injury During Detention
|
|
Dismissed with Prejudice |
Lewis
|
|
7/2005
|
|
US District Court Tal FL
|
|
Injury During Arrest
|
|
Dismissed with Prejudice |
Lash
|
|
8/2005
|
|
US District Court ED MO
|
|
Injury During Arrest
|
|
Dismissed with Prejudice |
Games
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|
8/2005
|
|
Circuit Court, Multnomah County, OR
|
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Injury During Arrest
|
|
Dismissed with Prejudice |
Bynum
|
|
10/2005
|
|
US District Court SD NY
|
|
Injury During Arrest
|
|
Discovery Phase |
Lopez
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|
11/2005
|
|
US District Court, ND IL Eastern Div
|
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Injury During Police Call
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|
Discovery Phase |
Bellemore
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|
2/2006
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AZ Superior Court
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Injury During Arrest
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Discovery Phase |
Wieffenbach
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|
6/2006
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Circuit Court of 12th Judicial District, Will County, Il
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Injury During Arrest
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Complaint Served |
Cruz
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7/2006
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CA Superior Court, Los Angeles County
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Injury During Arrest
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Complaint Served |
32
In
December 2005, the Company received a defense verdict in the Samuel Powers v. TASER International personal injury
case. As part of its legal strategy to aggressively defend these cases, the Company entered into a
settlement agreement with its own insurance provider in order to prevent its insurance provider
from settling the case with the plaintiff. Under the terms of the settlement, the Company received
$575,000 from its liability insurance provider associated with a settlement and release agreement
and the Company assumed all future potential liability and costs from and after the date the
settlement and release agreement was signed. After offsetting approximately $100,000 in legal
expenses to defend and win the trial, the Company has recorded the remaining balance of
approximately $475,000 as deferred income on its balance sheet. This deferred income will be used
to cover any costs through all appeals and the remaining balance if any will be recorded as other
income when final resolution is completed. During the three and six month period ended June 30,
2006, the Company expended approximately $3,000 and $37,000, respectively, in connection with the appeal and
reduced the deferred amount by these costs.
Other Litigation
In January 2005, we filed litigation in U.S. District Court for the Western District of North
Carolina against Stinger Systems, Inc. and Robert Gruder alleging false advertising and a violation
of the Lanham Act. The defendants have filed a counterclaim against the Company alleging
defamation. This case is in the discovery phase and no trial date has been set.
In February 2005, we filed litigation in Superior Court for Maricopa County against Thomas G.
Watkins III, our former patent attorney, for declaratory judgment, breach of fiduciary duty,
constructive fraud, and breach of contract. Mr. Watkins originally filed patent applications on our
behalf as our patent attorney for inventions utilized in the TASER X26 device in February and May
2003. In each patent application he filed a declaration stating that Magne Nerheim, our employee,
was the sole inventor. These patent applications are pending. Mr. Nerheim assigned his interest in
these patent applications to us. In December 2004 Mr. Watkins informed us that he now felt that he
was the inventor of a portion of this invention. We vigorously dispute his claim and we believe
that we are the sole owner of this invention. We have filed a motion for summary judgment in this
litigation in February 2006 which motion is pending before the Court. On February 14, 2006, U.S.
Patent No. US 6,999,295 entitled Dual Operating Mode Electronic Disabling Device For Generating A
Time-Sequenced, Shaped Voltage Output Waveform was issued to named inventors Thomas G. Watkins,
III and Mr. Nerheim. Mr. Nerheim assigned his interest in this patent to us. This patent covers a
portion of the technology utilized in the TASER X26 device. This patent was applied for by Mr.
Watkins without our knowledge or consent. Since we are a joint owner of this patent, this patent
will not restrict us from manufacturing and selling the TASER X26 device. We have other patent
applications pending that cover inventions contained in this patent.
In March 2006, the Court
issued a temporary restraining order and a preliminary injunction preventing Mr. Watkins from
selling, assigning, transferring or licensing this patent to a third party during the duration of
this litigation. On August 2, 2006 the Court issued an order
granting our motion for partial summary judgement on liability,
leaving open the matter of remedies and other residual issues for
resolution in subsequent proceedings.
In November 2005 and April 2006, we filed lawsuits in Marion County Circuit Court, Indiana and
in Fairfax County Circuit Court, Virginia, respectively, against James Ruggieri for defamation,
product disparagement, intentional interference with a business relationship, Lanham Act violations
and tortuously affecting the fairness and integrity of litigation as adverse third-party witness.
Mr. Ruggieri has counterclaimed for defamation and infliction of distress. This case is entering
the discovery phase and no trial date has been set.
In December 2005, we filed a lawsuit in Vigo County, Indiana, Superior Court against Roland M.
Kohr for defamation, product disparagement, Lanham Act violations, tortuously affecting the
fairness and integrity of litigation as adverse third-party witness, and intentional interference
with a business relationship. Dr. Kohr was the Medical Examiner and expert witness in the James
Borden wrongful death litigation which litigation was dismissed with prejudice. This case is in the
discovery phase and no trial date has been set.
In June 2006 we filed a lawsuit in U.S. District Court for the Central District of California
against Bestex Company, Inc. for patent infringement, false patent marking, unfair competition and
breach of written contract. Bestex filed a counterclaim for unfair competition and false
advertising. This case is entering the discovery phase and no trial date has been set.
General
From time to time, the Company is notified that it may be a party to a lawsuit or that a claim
is being made against it. It is the Companys policy to not disclose the specifics of any claim or
threatened lawsuit until the summons and complaint are actually served on the Company. We intend
to pursue and defend any lawsuit filed against or by the Company vigorously. Although we do not
expect the outcome in any individual case to be material, the outcome of any litigation is
inherently uncertain and there can be no assurance that any expense, liability and damages that may
ultimately result from the resolution of these matters will be covered by our insurance or will not
be in excess of amounts provided by insurance coverage and will not have a material adverse effect
on our business, operating results or financial condition. The
Company may settle a lawsuit in situations where
a settlement can be obtained for nuisance value and for an amount which
is expected to be less than the cost of defending a
lawsuit. Due to the confidentiality of our litigation strategy and the confidentiality agreements
that are executed in the event of a settlement, the Company will not identify or comment on which
lawsuits have been settled or the amount of any settlement.
33
Item 1A. Risk Factors
We are materially dependent on acceptance of our products by the law enforcement and
corrections market, and if law enforcement and corrections agencies do not purchase our products,
our revenues will be adversely affected and we may not be able to expand into other markets.
A substantial number of law enforcement and corrections agencies may not purchase our
conducted energy, non-lethal devices. In addition, if our products are not widely accepted by the
law enforcement and corrections market, we may not be able to expand sales of our products into
other markets. Law enforcement and corrections agencies may be influenced by claims or perceptions
that conducted energy weapons are unsafe or may be used in an abusive manner. In addition, earlier
generation conducted energy devices may have been perceived as ineffective. Sales of our products
to these agencies may also be delayed or limited by these claims or perceptions.
We substantially depend on sales of the TASER X26 products, and if these products are not
widely accepted, our growth prospects will be diminished.
In the three and six months ended June 30, 2006 and 2005, we derived our revenues
predominantly from sales of the TASER X26 brand devices and related cartridges, and we expect to
depend on sales of these products for the foreseeable future. A decrease in the prices of or demand
for these products, or their failure to achieve broad market acceptance, would significantly harm
our growth prospects, operating results and financial condition.
If
we are unable to manage the growth in our business, our prospects may be limited and our
future profitability may be adversely affected.
We intend to expand our sales and marketing programs and our manufacturing capacity as needed
to meet future demand. Any significant expansion may strain our managerial, financial and other
resources. If we are unable to manage our growth, our business, our operating results and financial
condition could be adversely affected. We will need to continually improve our operations,
financial and other internal systems to manage our growth effectively, and any failure to do so may
lead to inefficiencies and redundancies, and result in reduced growth prospects and profitability.
We may face personal injury, wrongful death and other liability claims that harm our
reputation and adversely affect our sales and financial condition.
Our products are often used in aggressive confrontations that may result in serious, permanent
bodily injury or death to those involved. Our products may cause or be associated with these
injuries. A person injured in a confrontation or otherwise in connection with the use of our
products may bring legal action against us to recover damages on the basis of theories including
personal injury, wrongful death, negligent design, dangerous product or inadequate warning. We are
currently subject to a number of such lawsuits. We may also be subject to lawsuits involving
allegations of misuse of our products. If successful, personal injury, misuse and other claims
could have a material adverse effect on our operating results and financial condition. Although we
carry product liability insurance, we do incur significant legal expenses within our self insured
retention in defending these lawsuits and significant litigation could also result in a diversion
of managements attention and resources, negative publicity and a potential award of monetary
damages in excess of our insurance coverage. The outcome of any litigation is inherently uncertain
and there can be no assurance that our existing or any future litigation will not have a material
adverse effect on our revenues, our financial condition or financial results.
Pending litigation may subject us to significant litigation costs, judgments in excess of
insurance coverage, and divert management attention from our business.
We
are involved in various litigation matters relating to our products or the use of such products,
litigation against persons who we believe have defamed our products, litigation against a
competitor, litigation against our former patent attorney as well as shareholder class action
lawsuits and derivative lawsuits.
Such matters have resulted and are expected to continue to result in substantial costs to us and a
likely diversion of our managements attention, which could adversely affect our business,
financial condition or operating results. In particular we recently
reached on agreement to settle our Shareholder class action lawsuits
and derivative lawsuits for approximately $21.75 million, of
which approximately $4.1 million is covered by insurance.
34
Our future success is dependent on our ability to expand sales through distributors and our
inability to recruit new distributors would negatively affect our sales.
Our distribution strategy is to pursue sales through multiple channels with an emphasis on
independent distributors. Our inability to recruit and retain police equipment distributors who can
successfully sell our products would adversely affect our sales. In addition, our arrangements with
our distributors are generally short-term. If we do not competitively price our products, meet the
requirements of our distributors or end-users, provide adequate marketing support, or comply with
the terms of our distribution arrangements, our distributors may fail to aggressively market our
products or may terminate their relationships with us. These developments would likely have a
material adverse effect on our sales. Our reliance on the sales of our products by others also
makes it more difficult to predict our revenues, cash flow and operating results.
If we are unable to design, introduce and sell new products successfully, our business and
financial results could be adversely affected.
Our future success will depend on our ability to develop new products that achieve market
acceptance in a timely and cost-effective manner. The development of new products is complex, and
we may experience delays in completing the development and introduction of new products. We cannot
provide any assurance that products that we may develop in the future will achieve market
acceptance. If we fail to develop new products on a timely basis that achieve market acceptance,
our business, financial results and competitive position could be adversely affected.
We expend significant resources in anticipation of a sale due to our lengthy sales cycle and
may receive no revenue in return.
Generally, law enforcement and corrections agencies consider a wide range of issues before
committing to purchase our products, including product benefits, training costs, the cost to use
our products in addition to or in place of other non-lethal products, budget constraints and
product reliability, safety and efficacy. The length of our sales cycle may range from a few weeks
to as long as several years. Adverse publicity surrounding our products or the safety of such
products has in the past and could in the future result in long sales
cycles with customers. In
particular, we believe our revenue decrease for the year ended December 31, 2005 compared to the
year ended December 31, 2004 was impacted by the adverse effect on customers and potential
customers of the negative publicity surrounding our products or use of our products. We may incur
substantial selling costs and expend significant effort in connection with the evaluation of our
products by potential customers before they place an order. If these potential customers do not
purchase our products, we will have expended significant resources and received no revenue in
return.
Most of our end-users are subject to budgetary and political constraints that may delay or
prevent sales.
Most of our end-user customers are government agencies. These agencies often do not set their
own budgets and therefore have little control over the amount of money they can spend. In addition,
these agencies experience political pressure that may dictate the manner in which they spend money.
As a result, even if an agency wants to acquire our products, it may be unable to purchase them due
to budgetary or political constraints. Some government agency orders may also be canceled or
substantially delayed due to budgetary, political or other scheduling delays which frequently occur
in connection with the acquisition of products by such agencies.
Government regulation of our products may adversely affect sales.
Federal regulation of sales in the United States: Our devices are not firearms regulated by
the Bureau of Alcohol, Tobacco, Firearms and Explosives, but are consumer products regulated by the
United States Consumer Product Safety Commission. Although there are currently no federal laws
restricting sales of our devices in the United States, future federal regulation could adversely
affect sales of our products.
Federal regulation of international sales: Our devices are controlled as a crime control
product by the United States Department of Commerce, or DOC, for export directly from the United
States. Consequently, we must obtain an export license from the DOC for the export of our devices
from the United States other than to Canada. Our inability to obtain DOC export licenses on a
timely basis for sales of our devices to our international customers could significantly and
adversely affect our international sales.
State and local regulation: Our devices are controlled, restricted or their use prohibited by
several state and local governments. Our devices are banned from private citizen sale or use in
seven states: New York, New Jersey, Rhode Island, Michigan, Wisconsin, Massachusetts and Hawaii.
Law enforcement use of our products is also prohibited in New Jersey. Some municipalities,
including Omaha, Nebraska and Washington, D.C., also prohibit private citizen use of our products.
Other jurisdictions may ban or restrict the sale of our products and our product sales may be
significantly affected by additional state, county and city governmental regulation.
35
Foreign regulation: Certain foreign jurisdictions, including Japan, Australia, Italy and Hong
Kong, prohibit the sale of conducted energy devices, limiting our international sales
opportunities.
Environmental laws and regulations subject us to a number of risks and could result in
significant liabilities and costs.
We may be subject to various state, federal and international laws and regulations governing
the environment, including restricting the presence of certain substances in electronic products
and making producers of those products financially responsible for the collection, treatment,
recycling and disposal of those products. Recent environmental legislation within the European
Union (EU) may increase our cost of doing business internationally and impact our revenues from EU
countries as we comply with and implement these new requirements.
The EU has published Directives on the restriction of certain hazardous substances in
electronic and electrical equipment (the RoHS Directive) which became effective in July 2006,
and on electronic and electrical waste management (the WEEE Directive). The RoHS Directive
restricts the use of a number of substances, including lead. The Waste Electrical and Electronic
Equipment Directive, or WEEE directs members of the European Union to enact laws, regulations, and
administrative provisions to ensure that producers of electric and electronic equipment are
financially responsible for the collection, recycling, treatment and environmentally responsible
disposal of certain products sold into the market after August 15, 2005 and from products in use
prior to that date that are being replaced. In addition, similar environmental legislation has been
or may be enacted in other jurisdictions, including the U.S. (under federal and state laws) and
other countries, the cumulative impact of which could be significant.
We continue to evaluate the impact of specific registration and compliance activities required
by the RoHS and WEEE Directives. We endeavor to comply with these environmental laws, yet
compliance with such laws could increase our operations and product costs; increase the
complexities of product design, procurement, and manufacturing; limit our ability to manage excess
and obsolete non-compliant inventory; limit our sales activities; and impact our future financial
results. Any violation of these laws can subject us to significant liability, including fines,
penalties, and prohibiting sales of our products into one or more states or countries, and result
in a material adverse effect on our financial condition.
If we are unable to protect our intellectual property, we may lose a competitive advantage or
incur substantial litigation costs to protect our rights.
Our future success depends in part upon our proprietary technology. Our protective measures,
including patents, trademarks and trade secret laws, may prove inadequate to protect our
proprietary rights. Our United States patent on the construction of the gas cylinder used to store
the compress nitrogen in our cartridges expires in 2015. Our patent on the process by which
compressed gases launch the probes in our cartridges expires in 2009. The scope of any patent to
which we have or may obtain rights may not prevent others from developing and selling competing
products. The validity and breadth of claims covered in technology patents involve complex legal
and factual questions, and the resolution of such claims may be highly uncertain, lengthy and
expensive. In addition, our patents may be held invalid upon challenge, or others may claim rights
in or ownership of our patents.
On February 14, 2006, U.S. Patent No. US 6,999,295 entitled Dual Operating Mode Electronic
Disabling Device For Generating A Time-Sequenced, Shaped Voltage Output Waveform was issued to
named inventors Thomas G. Watkins, III and Magne Nerheim. Mr. Nerheim assigned his interest in this
patent to us. This patent covers a portion of the technology utilized in the TASER X26 device. This
patent was applied for by Mr. Watkins, who was our former patent attorney, without our knowledge or
consent. Mr. Watkins originally filed patent applications on our behalf as our patent attorney for
the same inventions in February and May 2003 with the U.S. Patent and Trademark Office. In each
application he filed a declaration stating that Mr. Nerheim was the sole inventor. These patent
applications are pending. In December 2004, he informed us that he now felt that he was the
inventor of a portion of this invention. We vigorously dispute his claim and we have filed
litigation against Mr. Watkins for declaratory judgment, breach of fiduciary duty, constructive
fraud, and breach of contract. We believe that we are the sole owner of this invention. Since we
are a joint owner of this patent, this patent will not restrict us from manufacturing and selling
the TASER X26 device. We have other patent applications pending that cover inventions contained in
this patent. In March 2006, the court issued a temporary restraining order and a preliminary
injunction preventing Mr. Watkins from selling, assigning, transferring, or licensing this patent
to a third party during the duration of this litigation.
We may be subject to intellectual property infringement claims, which will cause us to incur
litigation costs and divert management attention from our business.
Any intellectual property infringement claims against us, with or without merit, could be
costly and time-consuming to defend and divert our managements attention from our business. If our
products were found to infringe a third partys proprietary rights, we could be required to enter
into royalty or licensing agreements in order to be able to sell our products. Royalty and
licensing agreements, if required, may not be available on terms acceptable to us or at all.
36
Competition in the law enforcement and corrections market could reduce our sales and prevent
us from achieving profitability.
The law enforcement and corrections market is highly competitive. We face competition from
numerous larger, better capitalized and more widely known companies that make other non-lethal
devices and products. Increased competition may result in greater pricing pressure, lower gross
margins and reduced sales. In this regard, in 2005 two different competitors announced plans to
introduce new products. We are unable to predict the impact such products will have on our sales or our sales cycle, but existing or potential
customers may choose to evaluate such products which could lengthen our sales cycle and potentially
reduce our future sales.
Defects in our products could reduce demand for our products and result in a loss of sales,
delay in market acceptance and injury to our reputation.
Complex components and assemblies used in our products may contain undetected defects that are
subsequently discovered at any point in the life of the product. In 2002, we recalled a series of
ADVANCED TASER devices due to a defective component. In connection with the recall, we incurred
expenses of approximately $25,000. Defects in our products may result in a loss of sales, delay in
market acceptance and injury to our reputation, potential legal liability and increased warranty
costs.
Component shortages could result in our inability to produce volume to adequately meet
customer demand. This could result in a loss of sales, delay in deliveries and injury to our
reputation.
Single source components used in the manufacture of our products may become unavailable or
discontinued. Delays caused by industry allocations, or obsolescence may take weeks or months to
resolve. In some cases, part obsolescence may require a product re-design to ensure quality
replacement circuits. These delays could cause significant delays in manufacturing and loss of
sales, leading to adverse effects significantly impacting our financial condition or results of
operations.
Our dependence on third party suppliers for key components of our devices could delay shipment
of our products and reduce our sales.
We depend on certain domestic and foreign suppliers for the delivery of components used in the
assembly of our products. Our reliance on third-party suppliers creates risks related to our
potential inability to obtain an adequate supply of components or subassemblies and reduced control
over pricing and timing of delivery of components and sub-assemblies. Specifically, we depend on
suppliers of sub-assemblies, machined parts, injection molded plastic parts, printed circuit
boards, custom wire fabrications and other miscellaneous customer parts for our products. We also
do not have long-term agreements with any of our suppliers. We believe that there are readily
available alternative suppliers in most cases, however there is no guarantee that supply will not
be interrupted. Any material interruption of supply for any components of our products could
significantly delay the shipment of our products and have a material adverse effect on our
revenues, profitability and financial condition.
Our dependence on foreign suppliers for key components of our products could delay shipment of
our finished products and reduce our sales.
We depend on foreign suppliers for the delivery of certain components used in the assembly of
our products. Due to regulatory changes imposed for imports of foreign products into the United States, as
well as potential port closures and delays created by terrorist threats, public health issues or
national disasters, we are exposed to risk of delays caused by freight carriers or customs
clearance issues for our imported parts. Delays caused by our inability to obtain components for
assembly could have a material adverse effect on our revenues, profitability and financial
condition.
We may experience a decline in gross margins due to rising raw material and transportation
costs associated with the increase in petroleum prices.
A significant number of our raw materials are comprised of petroleum based products, or incur
some form of landed cost associated with transporting the raw
materials or components to our
facility. The continued rise in oil prices could adversely impact our ability to sustain current gross
margins, by eliminating our ability to control component pricing.
37
Our revenues and operating results may fluctuate unexpectedly from quarter to quarter, which
may cause our stock price to decline.
Our revenues and operating results have varied significantly in the past and may vary
significantly in the future due to various factors, including, but not limited to: market
acceptance of our products and services, the outcome of any existing or future litigation, adverse
publicity surrounding our products, the safety of our products, or the use of our products,
increased raw material expenses, changes in our operating expenses, regulatory changes that may
affect the marketability of our products, and budgetary cycles of municipal, state and federal law
enforcement and corrections agencies. As a result of these and other factors, we believe that
period- to-period comparisons of our operating results may not be meaningful in the short term, and
our performance in a particular period may not be indicative of our performance in any future
period.
The Sarbanes-Oxley Act and other recent changes in securities laws and regulations have
increased our costs.
The Sarbanes-Oxley Act of 2002 as well as rules subsequently
implemented by the Securities and Exchange Commission and the NASDAQ Stock Market, have required
changes to some of our accounting and corporate governance practices, including a report on our
internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002. These rules and
regulations have increased our accounting, legal and other costs, and made some activities more
difficult, time consuming and/or costly. In particular, complying with the internal control
requirements of Sarbanes-Oxley Section 404 has resulted and will continue to result in increased
internal efforts, significantly higher fees from our independent registered public accounting firm
and significantly higher fees from third party contractors. These rules and regulations could make it more difficult and expensive for us to obtain director and officer liability insurance in the future and could also make it more difficult for us to attract
and retain qualified executive officers and qualified members of our board of directors,
particularly to serve on our audit committee.
We have experienced difficulties in complying with Sarbanes-Oxley Section 404.
Beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2005, as
filed on March 16, 2006, we are required to furnish a report by our management on our internal
control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. Such report
contained among other matters, an assessment of the effectiveness of our internal control over
financial reporting as of the end of our fiscal year (December 31, 2005), including a statement as
to whether or not our internal control over financial reporting was effective. Such report also
contained a statement that our independent registered public accounting firm has issued an
attestation report on managements assessment of such internal controls.
Based on the material weaknesses described in our Form 10-K, our management concluded that our
internal control over financial reporting was not effective as of December 31, 2005. Our
independent registered public accounting firm, Grant Thornton LLP, who also audited our
consolidated financial statements, audited managements assessment and independently assessed the
effectiveness of our internal control over financial reporting. Grant Thornton LLP issued their
attestation report, which was included in Part II, Item 9A of our Form 10-K.
As described in Item 4 of this Form 10-Q, because of the fact that there has been insufficient
time in which to demonstrate the consistent operational effectiveness of the remediation efforts
related to previously disclosed material weaknesses in internal control over financial reporting,
our disclosure controls and procedures were ineffective as of June 30, 2006. Our disclosure
controls and procedures include components of our internal control over financial reporting.
In connection with our ongoing Section 404 compliance efforts, we are also continuing to make
improvements to our systems, procedures and controls. Due to our conclusion that our internal
control over financial reporting was not effective at December 31, 2005 and our conclusion that our
disclosure controls and procedures were not effective at June 30, 2006, we could lose investor
confidence in the accuracy and completeness of our financial reports, which could have an adverse
effect on our stock price.
Recent regulations related to equity compensation has resulted in significantly higher
expenses and could adversely affect our ability to attract and retain key personnel.
Stock options are a fundamental component of our employee compensation packages. We believe
that stock options directly motivate our employees to maximize long-term stockholder value and,
through the use of vesting, encourage employees to remain with us. In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement 123R, Share-Based Payment, which requires all
companies to measure compensation cost for all share-based payments (including employee stock
options) at fair value. This requirement was effective for us beginning in the first quarter of
2006. Statement 123R will negatively impact our earnings. We recorded stock-based compensation for
the second quarter and first half of 2006 of $312,000 and $674,000, respectively. In addition,
regulations implemented by The NASDAQ Stock Market requiring shareholder approval for all stock
option plans as well as regulations implemented by the NYSE prohibiting NYSE member organizations
from giving a proxy to vote on equity-compensation plans unless the beneficial owner of the shares
has given voting instructions could make it more difficult for us to grant options to employees in
the future. To the extent that new regulations make it more difficult or expensive to grant options
to employees, we may incur additional cash compensation costs, change our equity compensation
strategy or find it difficult to attract, retain and motivate employees, each of which could
materially and adversely affect our business.
38
Foreign currency fluctuations may affect our competitiveness and sales in foreign markets.
The relative change in currency values creates fluctuations in product pricing for potential
international customers. These changes in foreign end-user costs may result in lost orders and
reduce the competitiveness of our products in certain foreign markets. These changes may also
negatively affect the financial condition of some existing or potential foreign customers and
reduce or eliminate their future orders of our products.
Use of estimates may cause our financial results to differ from expectations.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
We face risks associated with rapid technological change and new competing products.
The technology associated with non-lethal devices is receiving significant attention and is
rapidly evolving. While we have patent protection in key areas of electro-muscular disruption
technology, it is possible that new non-lethal technology may result in competing products that
operate outside our patents and could present significant competition for our products.
To the extent demand for our products increases, our future success will be dependent upon our
ability to ramp manufacturing production capacity which will be accomplished by the implementation
of customized manufacturing automation equipment.
Although our revenue decreased in 2005 compared to 2004, we experienced significant revenue
growth in 2003 and 2004 and our revenue grew in the second quarter and first six months of 2006
compared to the same periods in 2005. To the extent demand for our products increases significantly
in future periods, one of our key challenges will be to ramp our production capacity to meet sales
demand, while maintaining product quality. Our primary strategies to accomplish this include
increasing the physical size of our assembly facilities, the hiring of additional production staff,
and the implementation of customized automation equipment. We have limited previous experience in
implementing automation equipment, and the investments made on this equipment may not yield the
anticipated labor and material efficiencies. Our inability to meet any future increase in sales
demand or effectively manage our expansion could have a material adverse affect on our revenues,
financial results and financial condition.
We depend on our ability to attract and retain our key management and technical personnel.
Our success depends upon the continued service of our key management personnel. Our success
also depends on our ability to continue to attract, retain and motivate qualified technical
personnel. Although we have employment agreements with certain of our officers, the employment of
such persons is at-will and either we or the employee can terminate the employment relationship
at any time, subject to the applicable terms of the employment agreements. The competition for our
key employees is intense. The loss of the service of one or more of our key personnel could harm
our business.
39
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of our security holders at our annual shareholders
meeting held on May 24, 2006:
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Election of Thomas P. Smith and Matthew R. McBrady to serve a three year term on the Board of Directors |
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Ratification of the appointment of Grant Thornton LLP as our independent auditors for the year ended
December 31, 2006. |
Election of Directors
The allocation of votes for the election of Thomas P. Smith and Matthew R. McBrady to
the Board of Directors was as follows:
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YES |
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|
% |
|
|
NO |
|
|
% |
|
|
WITHHELD |
|
|
% |
|
|
NON-VOTES |
|
|
% |
|
1 |
|
Thomas P. Smith |
|
|
54,149,073 |
|
|
|
95.5 |
|
|
|
0 |
|
|
|
0.0 |
|
|
|
2,556,591 |
|
|
|
4.5 |
|
|
|
0 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Matthew R. McBrady |
|
|
55,229,278 |
|
|
|
97.4 |
|
|
|
0 |
|
|
|
0.0 |
|
|
|
1,476,386 |
|
|
|
2.6 |
|
|
|
0 |
|
|
|
0.00 |
|
Ratification of Auditors
The allocation of votes for the ratification of Grant Thornton LLP as our independent
auditors for the year ended December 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YES |
|
% |
|
|
NO |
|
|
% |
|
|
ABSTAIN |
|
|
% |
|
|
NON-VOTES |
|
|
% |
|
55,919,990 |
|
|
98.61 |
|
|
|
657,247 |
|
|
|
1.15 |
|
|
|
128,246 |
|
|
|
0.22 |
|
|
|
0 |
|
|
|
0.00 |
|
The proposals above are described in detail in the Companys definitive proxy statement dated April
10, 2006, for the Annual Meeting of Shareholders held on May 24, 2006.
ITEM 6. EXHIBITS
|
|
|
31.1
|
|
Chief Executive Officer Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
|
|
|
31.2
|
|
Chief Financial Officer Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
|
|
|
|
32.1
|
|
Chief Executive Officer
Certification pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Chief Financial Officer
Certification pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
TASER INTERNATIONAL, INC.
(Registrant)
|
|
Date: August 9, 2006 |
/s/ Patrick W. Smith
|
|
|
|
|
|
Patrick W. Smith,
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: August 9, 2006 |
/s/ Daniel M. Behrendt
|
|
|
|
|
|
Daniel M. Behrendt
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
41
Index to Exhibits
|
|
|
Exhibits: |
|
|
31.1
|
|
Chief Executive Officer Certification pursuant to Rule 13a-14(a) under the Securities exchange Act of 1934. |
|
|
|
31.2
|
|
Chief Financial Officer Certification pursuant to Rule 13a-14(a) under the Securities exchange Act of 1934. |
|
|
|
32.1
|
|
Chief Executive Officer Certification pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Chief Financial Officer Certification pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
42